Investment Multiplier Excitement!

What is the value of the government spending multiplier if marginal propensity to consume is 0.6?

A. 0.1333

B. 0.4

C. 1.333

D. 2.5

What is the investment multiplier and how is it calculated?

The investment multiplier is the margin by which growth in output or income outpaces growth in investment. It is determined as the ratio of changes in investment and income, denoted by the letter "k".

Answer:

The value of the government spending multiplier when marginal propensity to consume is 0.6 is D. 2.5

Explanation:

The investment multiplier (k) is calculated using the formula: Multiplier(k) = Change in income / Change in investment = 1 / (1 - MPC) where MPC is the marginal propensity to consume.

If MPC = 0.6, then the investment multiplier is 1 / (1 - 0.6) = 1 / 0.4 = 2.5 times.

Therefore, the investment multiplier when MPC is 0.6 is 2.5.