IGCSE/GCSE/O & A Level/IB/University Student Forum

Qualification => Subject Doubts => GCE AS & A2 Level => Commerce => Topic started by: Monopoly on March 08, 2011, 03:39:13 pm

Title: CIE Economics A2 mcq
Post by: Monopoly on March 08, 2011, 03:39:13 pm

this is from November 2004, p3, q21

(21) In a closed economy, households pay $0.40 in tax on every $1 increase in their gross income, and spend 5/6 of every increase in their disposable income.
What is the value of the multiplier?
A 2
B 2.5
C 3
D 6

Title: Re: CIE Economics A2 mcq
Post by: $tyli$h Executive on March 08, 2011, 03:55:33 pm

Multiplier = 1/(1-marginal propensity to consume)

0.4$ is taxed. So, remaining = 1-0.4=$0.6

5/6 of remainder is spent, so, spending/dollar=5/6 * 0.6 = 0.5

So, MPC = 0.5

Substitute MPC into the formula, ie. 1/(1-.5)

Answer is 2 (option A)

Title: Re: CIE Economics A2 mcq
Post by: Monopoly on March 08, 2011, 07:03:06 pm

Quote from: $tyli$h Executive on March 08, 2011, 03:55:33 pm

MPC = 0.5

So u r saying that 0.6 is the disposable income and 0.5 is spent out of that. Thus for every $1 increase in their gross income, there is an increase of $0.5 and so mpc=0.5/1=0.5.