Question : The value of the multiplier is calculated as:
Option 1: 1 / MPS
Option 2: 1 / MPC
Option 3: 1 / (1 - MPC)
Option 4: 1 / (1 - MPS)
Correct Answer: 1 / (1 - MPC)
Solution : The correct answer is (c) 1 / (1 - MPC).
The multiplier represents the overall impact on real GDP (gross domestic product) resulting from an initial change in autonomous expenditure (such as government spending or investment). The formula for calculating the multiplier is 1 divided by the marginal propensity to consume (MPC).
The rationale behind this calculation is that when there is an increase in autonomous expenditure, it stimulates additional spending. The initial increase in expenditure leads to an increase in income, a portion of which is then spent, creating a cycle of further increases in spending and income. The multiplier captures this cumulative effect.
So, to calculate the multiplier, you take 1 and divide it by the marginal propensity to consume (MPC), which represents the proportion of additional income that is consumed rather than saved.
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