The expenditure multiplier will be largest in which case
Answer: (d) Households save 10 cents of every extra dollar in disposable income received.
The answer is Option (d)
Refer also to the answer in Question 3.
The determinants of the multiplier's value all influence how much of the initial spending injection is subsequently induced into the next round of spending and beyond, noting that at each round the induced extra spending gets smaller and smaller.
We can think of this in terms of the leakages from the expenditure stream: taxation, saving and import spending.
So when government spending rises, GDP rises but so does tax revenue, household saving and import expenditure.
Each time GDP rises, these leakages ensure that the amount that will flow into the expenditure stream next period is smaller than the last period from an initial spending injection that disturbs the steady state.
The expenditure multiplier is higher when:
(a) The marginal propensity to consume (MPC), which is the fraction of every dollar of disposable income consumed, is highest. The MPC can be any value of 0 to 1 (conceptually), which means that the marginal propensity to save (MPS) equals 1 - MPC.
The higher the MPC, the higher is the induced household consumption expenditure out of disposable income following an initial spending injection (say from government).
(b) the lower is the tax rate - so the rise in disposable income is higher for every extra dollar of GDP.
(c) the lower is the marginal propensity to import, which is the fraction of every dollar of GDP that goes into buying imports.
In the question:
So the answer is Option (d) and we are assuming the other determinants of the multiplier were constant across each of the options.