Question

Which of the following statements is/are true in a closed economy with government where consumers save a part of their disposable income?

Select one:

a. The expenditure multiplier is always between 0 and 1.

b. The expenditure multiplier is always greater than 1.

c. The expenditure multiplier can vary from 0 to a number greater than 1.

d. None of the other answers are correct.

e. The expenditure multiplier is always less than the tax multiplier.

Answer #1

**b. The expenditure multiplier is always greater than
1.**

It is given that the consumers save a part of their disposable income. So, if the income of consumers increases, the consumers save a part of that increaed income.

Marginal propensity to save (MPS) is the change in savings for a given change in disposable income.

So, MPS =

Change in savings/change in disposable income

We know that consumers save only a part of disposable income. So,

change in savings > change in disposable income.

So 0 < MPS < 1

Expenditure multiplier = 1/MPS

0 < MPS < 1 -----> 1/MPS > 1

So, when consumers save a part of their disposable income, expenditure multiplier is always greater than 1.

So, option b is correct.

[ Tax multiplier = -(1-MPS)/MPS. It may or may not be greater than expenditure multiplier. So, the option d is incorrect.]

In a simple closed economy where there is no government and
investment, the consumption function of households is given by
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a. 0.40
b. 1.66
c. 2.5
d. 0.60
e. None of the other four choices

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