If the MPC is 3/5, then what is the multiplier?
Understand the Problem
The question is asking for the calculation of the multiplier given that the marginal propensity to consume (mpc) is 3/5. To find the multiplier, we use the formula: Multiplier = 1 / (1 - mpc). Therefore, we will substitute 3/5 into this formula to find the answer.
Answer
The multiplier is $2.5$.
Answer for screen readers
The multiplier is $2.5$.
Steps to Solve
- Identify the formula for the multiplier
The formula for calculating the multiplier is:
$$ \text{Multiplier} = \frac{1}{1 - \text{mpc}} $$
Where "mpc" represents the marginal propensity to consume.
- Substitute the value of mpc
We know that the marginal propensity to consume (mpc) is given as $ \frac{3}{5} $. We will substitute this value into the formula.
$$ \text{Multiplier} = \frac{1}{1 - \frac{3}{5}} $$
- Simplify the equation
Next, we need to simplify the expression in the denominator:
$$ 1 - \frac{3}{5} = \frac{5}{5} - \frac{3}{5} = \frac{2}{5} $$
Now, the equation becomes:
$$ \text{Multiplier} = \frac{1}{\frac{2}{5}} $$
- Calculate the multiplier
To calculate the multiplier, we can rewrite the division of fractions:
$$ \text{Multiplier} = 1 \cdot \frac{5}{2} = \frac{5}{2} $$
Which simplifies to:
$$ \text{Multiplier} = 2.5 $$
The multiplier is $2.5$.
More Information
The multiplier is a crucial concept in economics, showing the relationship between an initial change in spending and the resulting larger change in economic activity. Thus, a multiplier of $2.5$ means that for every dollar increase in spending, the overall economic activity increases by $2.5$.
Tips
- Incorrectly calculating the denominator: Make sure to correctly subtract the fraction from 1. Remember that the denominator should be simplified properly as shown in step 3.
- Misapplying the formula: Always check that you are using the correct formula for the multiplier.
