Question

If the marginal propensity to consume is 0.75, the multiplier for taxes and transfer payments is:1. 3
2. 4.
3. 0.25.
4. 0.75.

Answer 1

Answer:

option (1) 3

Explanation:

Data provided in the question:

Marginal propensity to consume, MPC = 0.75

Now,

Tax multiplier = 1 - [1 ÷ ( 1 - MPC ) ]

or

Tax multiplier = 1 - [ 1 ÷ ( 1 - 0.75 ) ]

or

Tax multiplier = 1 - 4

or

Tax multiplier = - 3

And,

Transfer payment multiplier = MPC ÷ [ 1 - MPC ]

or

Transfer payment multiplier = 0.75 ÷ [ 1 - 0.75 ]

or

Transfer payment multiplier = 0.75 ÷ 0.25

or

Transfer payment multiplier = 3

Hence,

Answer is option (1) 3