Question 74

The multiplier is 5 when the marginal propensity to consume is 0.8.

The multiplier can be calculated using the formula \( \text{Multiplier} = \frac{1}{1 - \text{MPC}} \). With a marginal propensity to consume (MPC) of 0.8, the multiplier equals \( \frac{1}{1 - 0.8} = 5 \).

A) 2

Option A is incorrect because a multiplier of 2 would imply a marginal propensity to consume of 0.5, calculated as \( \frac{1}{1 - 0.5} \). This does not match the given MPC of 0.8.

B) 4

Option B is also incorrect. A multiplier of 4 would suggest an MPC of 0.75, derived from \( \frac{1}{1 - 0.75} \). This value does not correspond to the provided MPC of 0.8.

C) 5

Option C is correct because the calculation of the multiplier with an MPC of 0.8 yields 5. Using the formula \( \frac{1}{1 - 0.8} \), we confirm that the multiplier is indeed 5.

D) 8

Option D is incorrect as it indicates a multiplier of 8, which would require an MPC of 0.875, calculated as \( \frac{1}{1 - 0.875} \). This does not align with the specified MPC of 0.8.

Conclusion

The correct answer, C, is clearly justified by the calculation of the multiplier based on the marginal propensity to consume. All other options miscalculate the relationship between the MPC and the multiplier, demonstrating a fundamental misunderstanding of the formula involved. Thus, option C is the only valid answer in this context.