Chapter 4R, Problem 21MCQ

To determine

To determine the spending multiplier using Marginal Propensity to Consume as given.

Explanation of Solution

The spending multiplier given MPC $=0.8$ is as follows

Spending multiplier $=\frac{1}{\left(1-c\right)}=\frac{1}{\left(1-0.8\right)}=\frac{1}{0.2}=5$

Hence, the correct option is ‘e’.

Mathematically, the rest of the options are incorrect.

Economics Concept Introduction

The spending multiplier shows what impact a change in autonomous spending will have on total spending and aggregate demand in the economy. Its mathematical calculation can be done using the formula $\frac{1}{\left(1-c\right)}$ , where $c$ is the marginal propensity to consume.