Question

If Marginal Propensity to Consume (MPC) is 0.5, then income multiplier is:

• A. 2.0
• B. 5.0
• C. 1.0
• D. 1.5

Hint:

The income multiplier indicates how much economic output will increase for every increase in spending. The larger the MPC, the higher the multiplier effect.

Answer 1

The Correct Option is A

The income multiplier is calculated using the formula: \[ \text{Income Multiplier} = \frac{1}{1 - MPC} \] Given that \(MPC = 0.5\), the income multiplier is: \[ \text{Income Multiplier} = \frac{1}{1 - 0.5} = \frac{1}{0.5} = 2 \] Thus, the correct answer is (a) 2.0.