Question

1.

Answer the question on the basis of the following data for a private closed economy.

  GDP = DI C
$100 100

120 114

140 128

160 142

180 156

200 170

Refer to the data. What is the value of the multiplier in this economy?

Group of answer choices

2.67.

3.33.

4.

5.

2.

Suppose the MPC = 0.9 and income increases by $18 in the second round of the multiplier process. By how much was spending increased?

Group of answer choices

$42

$36

$18

$20

Answer 1

GDP=DI	C
100	100
120	114
140	128
160	142
180	156
200	170

(1) Every $20 increase in DI leads to increase in C by $14.

=> change in DI = $20

=> change in C = $14.

MPC = (Change in C / Change in DI)

MPC = ($14 / $20)

MPC = 0.7

Multiplier = 1 / (1 - MPC) = 1 / (1 - 0.7) = 1 / 0.3 = 3.33.

Answer: Option (B) i.e., 3.33

(2) Income increase by $18 in second round of multiplier process.

It means consumption increase by $18 in first round.

Let us suppose autonomous spending was increased by X.

In first round 90 % of X (or 0.9 of X) in consumed and rest has been saved.

=> 0.9 X = $18

=> X = ($18 / 0.9)

=> X = $20.

Thus, spending was increased by $20.

Answer: Option (D)