Given that Y = C + I and C = bY where b = 0.8, what is the multiplier?

Answer Details

The multiplier refers to the change in the overall level of output that results from a change in one of its components, such as consumption or investment. In this case, the equation Y = C + I tells us that output (Y) is determined by consumption (C) and investment (I). We also know that consumption is determined by the fraction b of output, or C = bY where b = 0.8. So if there is a change in investment spending (I), this will directly affect output (Y), but it will also indirectly affect consumption (C) since consumption is a function of output. The multiplier is the factor by which a change in investment spending is multiplied to find the resulting change in output. To calculate it, we can use the formula: Multiplier = 1 / (1 - b) In this case, b = 0.8, so the multiplier is: Multiplier = 1 / (1 - 0.8) = 5 Therefore, the answer is.