PRC-3 · Chapter 15 · Question 6 of 44
If the Marginal Propensity to Consume (MPC) in an economy is 0.8 (meaning citizens spend 80% of any new income), what is the value of the investment multiplier? (Multiplier = 1 / (1 - MPC))
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) 5
Explanation
Using the formula K = 1 / (1 - MPC). K = 1 / (1 - 0.8) = 1 / 0.2 = 5. Any new injection will be multiplied 5 times.
More Multiplier and Accelerator MCQs
- Q8A nation notices that it requires Rs. 4 worth of new heavy machinery (capital) to permanently produce Rs. 1 worth of extra annual output…
- Q9The government spends Rs. 100 million building a hospital. The construction workers spend 80% of their new wages on food and clothes. The…
- Q10While the Multiplier shows how Investment drives Consumption, the 'Accelerator Theory' focuses on the reverse relationship. It states that:
- Q11If a nation's citizens decide to suddenly save a massive portion of their income out of fear of a recession, causing the Marginal…
- Q12During a specific phase of the business cycle, an economy experiences two consecutive quarters of declining GDP, rising unemployment, and…