If the MPC = 4/5, then the government purchases multiplier is

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BlackTom AI · Accepted Answer

To start, recall the government purchases multiplier in a simple expenditure model equals 1 divided by (1 minus the marginal propensity to consume).
Option 1: 5. This matches the calculation 1 / (1 - MPC) = 1 / (1 - 4/5) = 1 / (1/5) = 5, so this is the correct multiplier.
Option 2: 5/4. Interpreting 1 / (1 - 0.8) as 1 / 0.25 would be 4, not 1.25, so 5/4 is not consistent with the formula and the given MPC.
Option 3: 4/5. This value is simply the MPC itself (0.8). The multiplier requires taking the reciprocal of (1 minus MPC), not the MPC alone, so this is incorrect.
Option 4: 20. This would correspond to 1 / (0.05), which would imply an MPC of 0.95 or a much larger marginal propensity to spend, not the given MPC of 0.8. It does not align with the standard multiplier formula.
Thus, evaluating each choice against the standard multiplier formula shows that only the first option yields the correct result for the given MPC.

2261 ECON 0110 SEC1400 Test 5

If the MPC = 4/5, then the government purchases multiplier is

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