If, in an economy, a $200 billion increase in consumption spending creates $200 billion of new income in the first round of the multiplier process and $120 billion in the second round, the multiplier and the marginal propensity to save will be, respectively:

a. 5.00 and 0.80

b. 4.00 and 0.75

c. 3.33 and 0.70

d. 2.50 and 0.40

Option (d) will be the correct option

Explanation:

We have given that the new income in first round of multiplier process = $200

And new income after the second round of multiplier = $120

We know that marginal propensity to save is given by

Marginal propensity to save =

Now we know that multiplier is given by

So option (d) will be the correct option

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