Homework Answers
Answer to the question is option c) The multiplier = 2
This is because , multiplier = 1/(1 - MPC)
MPC = Change in consumption / Change in real income
That is , MPC = ∆C / ∆Y
∆C = when real income equals 0 , consumption equals 3000. And when real income equals 3000 , consumption equals 4500. Consumption is measured along aggregate expenditure line and real income is measured along the 45° line. So therefore change in consumption equals 1500 (4500-3000).
∆Y = Change in real income equals 3000 (3000-0)
So therefore MPC = ∆C/∆Y = 1500/3000 = 1/2
Hence , multiplier = 1/(1 - 1/2) = 1/(1/2) = 2
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