Question

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

• A. 0
• B. 1
• C. 1.25
• D. 2

Answer 1

The correct option is C

1.25

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

Multiplier= 1.25