Macro

Government Budget

Medium

Calculate the value of the government expenditure multiplier at a given MPC = 0.80 and tax rate = 0.25.

2.5

1.33

0.95

✅ Correct Option: 1

With a proportional income tax, the government expenditure multiplier is $\frac{1}{1 - c(1-t)}$ .

Here $c = 0.80$ and $t = 0.25$ , so $c(1-t) = 0.80 \times 0.75 = 0.60$ .

Multiplier $= \frac{1}{1 - 0.60} = \frac{1}{0.40} = 2.5$ .

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Solution

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