If marginal propensity to consume is 0.80, calculate the value of multiplier.
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When MPC = 0.8, for example, when people gets an extra dollar of income, they spend 80 cents of it. So the Keynesian multiplier works as follow, assuming for simplicity, MPC = 0.8. Then when the government increases expenditure by 1 dollar on a good produced by agent A, this dollar becomes A's income.
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Investment multiplier refers to the number of time by which the increase in output or income exceeds the increase in investment. It is measured as the ratio between change in income and change in investment and it is denoted as 'k'.
If MPC= 0.8, then
Multiplier(k) = 1/( 1 - 0.8) = 1/ 0.2 = 10/2 = 5 times.
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