CIMA BA1 · Chapter 1 · Question 7 of 10
In an open economy with a government sector, the marginal propensity to save is 0.1, the marginal rate of taxation is 0.25 and the marginal propensity to import is 0.15, each expressed as a proportion of national income. Government spending rises by $60bn. What is the resulting increase in national income?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: D) $120bn
Explanation
Total marginal propensity to withdraw = 0.1 + 0.25 + 0.15 = 0.5. Multiplier = 1 / 0.5 = 2. Increase in national income = 2 x $60bn = $120bn.
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