The government expenditure multiplier is a key concept in macroeconomics that measures the change in national income (Y) resulting from a change in government spending (G). It's calculated as the reciprocal of (1 - MPC), where MPC is the marginal propensity to consume.
In this case, the MPC (Marginal Propensity to Consume) is given as 0.8. This means that for every additional dollar of income, 80 cents are spent on consumption. The remaining 20 cents are saved. This implies a significant level of consumer spending within the economy.
The formula for the government expenditure multiplier is:
\( \text{Multiplier} = \frac{1}{1 - \text{MPC}} \)
Substituting the given MPC value (0.8) into the formula:
\( \text{Multiplier} = \frac{1}{1 - 0.8} = \frac{1}{0.2} = 5 \)
Therefore, a change in government spending will lead to a five-fold change in the national income (Y). This high multiplier effect suggests that government expenditure is a potent tool for influencing aggregate demand and economic growth. A higher MPC leads to a larger multiplier effect because increased consumption further stimulates the economy.
The correct answer is 5.
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Important Questions from Indian Economy
- Small-scale industries in India in 1950 were defined as all those industries in which the maximum investment amounted to:
- The fifth and sixth five-year plans were majorly focused on which of the following?
The Primary Deficit is zero in which of the following situations?
A. Fiscal Deficit is zero.
B. Interest payment is equal to Fiscal Deficit.- What trend is reflected by increasing share of urban people in non-manual tertiary occupations?
- Consider the emphasis placed on the public sector in India's industrial development strategy between 1947 and 1990. What was a
key rationale behind giving the public sector a dominant role during this period?
