Question

If the tax rate is 0.5 and the MPC is 0.4, is the government spending multiplier.

• A. 0.0
• B. 1
• C. 1.25
• D. 2

Answer 1

The correct option is C 1.25

Multiplier = $\frac{1}{(1-c(1-t\left)\right)}$
= $\frac{1}{1-(0.4\times 0.5)}$
Multiplier = 1.25