Nov 2004 paper 3 question 21

[arvind0708]

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 21/2 C 3 D 6


how to get the answer.

 

[JACK HERROR]

here mrt = o.4
disposable income = 1-0.4 = o.6
therefore mpc = (5/6) * 0.6 = 0.5
multiplier = 1/(1-mpc)
=1/0.5
=2

ans a