In a closed economy with no taxes, if the marginal propensity to consu

In a closed economy with no taxes, if the marginal propensity to consume is always 0.90, then the value of the multiplier will be

[amp_mcq option1=”10.00″ option2=”1.00″ option3=”0.90″ option4=”0.10″ correct=”option1″]

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UPSC CAPF – 2019

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The correct answer is A, 10.00.

In a simple Keynesian model with a closed economy and no government (no taxes or government spending), the expenditure multiplier (k) is given by the formula k = 1 / (1 – MPC), where MPC is the marginal propensity to consume.

Given that the marginal propensity to consume (MPC) is 0.90, the multiplier is calculated as k = 1 / (1 – 0.90) = 1 / 0.10 = 10. This means that a initial change in autonomous spending will lead to a tenfold larger change in equilibrium income.

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