Question

In a simple closed economy where there is no government and investment, the consumption function of...

In a simple closed economy where there is no government and investment, the consumption function of households is given by C(Y)=60+0.6Y. The potential output in this economy at 450. What is the expenditure multiplier in this economy?

Select one:

a. 0.40

b. 1.66

c. 2.5

d. 0.60

e. None of the other four choices

Homework Answers

Answer #1

the correct option for the given problem is OPTION-C

we can solve this problem as follow-

STEP -1-

  • the consumption function comprises of inception (a) and MPC (b)
  • the formula for expenditure multiplier is same as investment multiplier.

MPC implies marginal propensity to consume.

STEP-2

STEP-3

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