Question on: JAMB Economics - 2002
In a closed economy, the marginal propensity to consume is 0.6 and the average propensity to consume 0.8. The value of the multiplier is?
A
2.5
B
2.6
C
2.7
D
2.4
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Correct Option: A
The question deals with the concept of the multiplier effect in economics. The multiplier effect refers to the increase in final income arising from any new injection of spending.
Here's how to solve the problem:
- Identify the relevant concept: The multiplier is calculated using the marginal propensity to consume (MPC).
- Formula: The multiplier (k) is calculated as: k = 1 / (1 - MPC)
- Substitute the given value: MPC is given as 0.6.
- Calculate: k = 1 / (1 - 0.6) = 1 / 0.4 = 2.5
- Average propensity to consume (APC) value of 0.8 is irrelevant.
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