Answer:
[tex] GPM = \frac{1}{1-[0.9(1-0.25)-0.05]}=2.67[/tex]
Explanation:
Previous concepts
The government purchase multiplier represent the "change in income due to an increase in government spending. The amount of expansion of income depends on the value of the marginal propensity to consume"
Solution to the problem
For this case we need to use this formula:
[tex] GPM = \frac{1}{1-[C(1-T)-I]}[/tex]
Where:
GPM= Government purchases multiplier
C= Represent the consume fraction=0.9
I= Represent the import fraction = 0.05 (Value assumed)
T= Represent the tax rate fraction=0.25
So then if we replace we got:
[tex] GPM = \frac{1}{1-[0.9(1-0.25)-0.05]}=2.67[/tex]
And that represent the Government purchases multiplier for this case.