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If, in an economy, a $200 billion increase in consumption spending creates $200 billion of new income in the first round of the multiplier process and $120 billion in the second round, the multiplier and the marginal propensity to save will be, respectively:

A. 5.00 and 0.80

B. 4.00 and 0.75

C. 3.33 and 0.70

D. 2.50 and 0.40

Respuesta :

Answer:

Option (d) will be the correct option

Explanation:

We have given that the new income in first round of multiplier process = $200

And new income after the second round of multiplier = $120

We know that marginal propensity to save is given by

Marginal propensity to save = [tex]1-\frac{income\ after\ second\ round\ of\multiplier}{income\ after\ first\ round\ of\multiplier}=1-\frac{120}{200}=1-0.6=0.4[/tex]

Now we know that multiplier is given by [tex]multiplier=\frac{1}{marginal\ prosperity\ to\ save}=\frac{1}{0.4}=2.5[/tex]

So option (d) will be the correct option

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