An increase in the MPC

Question

BlackTom AI · Accepted Answer

Starting from the relationship between marginal propensity to consume (MPC) and the fiscal multiplier helps us evaluate each choice. When MPC rises, the spending pulse from a given change in autonomous spending gets amplified more as households consume a larger portion of any income they receive.
Option 1: 'increases the multiplier, so that changes in government expenditures have a smaller effect on aggregate demand.' This is incorrect because a higher MPC actually amplifies the impact of spending on aggregate demand, not dampens it. A larger fraction of additional income is spent, so the total effect is bigger, not smaller.
Option 2: 'increases the multiplier, so that changes in government expenditures have a larger effect on aggregate demand.' This aligns with the basic multiplier logic: the multiplier ≈ 1/(1 − MPC). As MPC rises, the denominator shrinks, the multiplier grows, and each dollar of government spending yields a bigger increase in aggregate demand. This option correctly captures the relationship.
Option 3: 'decreases the multiplier, so that changes in government expenditures have a smaller effect on aggregate demand.' This would be true if MPC fell, not risen. Since we’re told MPC increases, this statement contradicts the mathematical link between MPC and the multiplier, making it false.
Option 4: 'decreases the multiplier, so that changes in government expenditures have a larger effect on aggregate demand.' This combines an incorrect claim (decrease in the multiplier) with an effect (larger). The two parts are inconsistent with the standard multiplier formula, so this option is ruled out.
In summary, the only option that coherently reflects the effect of a higher MPC on the fiscal multiplier is Option 2, which states that the multiplier increases and government expenditure changes have a larger impact on aggregate demand.

An increase in the MPCSingle choice

Similar Questions

In theory, an initial injection of spending of $1 million by a government can result in an increase in real Gross Domestic Product (GDP) greater than $1 million due to

An initial increase in government spending of $100 billion can create more than $100 billion of spending throughout the economy by what economists call the __________ effect.

35. Refer to the figure. If the aggregate demand curve shifts from AD2 to AD1, the multiplier effect on real GDP will be a decrease from A. Q3 to Q1. B. Q2 to Q4. C. Q2 to Q1. D. Q3 to Q4.

55. If households in the economy save more of any extra income that they earn, then the multiplier effect will A. increase. B. decrease. C. be unaffected. D. become less than 1.0.

Assume that MPC is the one you calculated in Question 5. Transfer payments increase by 40,000.00 units. As a result, the real GDP will change by [Fill in the blank], units.

Suppose the marginal propensity to consume is 0.75. If businesses become more optimistic about the future and raise their investment by $10, the short-run equilibrium output will _____ and consumption will _.

As contrasted to the mainstream view, Keynesian economists believe that ________ than mainstream economists believe.

More Practical Tools for Students Powered by AI Study Helper

Homework AI Solver

Stylized AI Paper Writer

Plagiarism Checker Assistant

Citation AI Academic Writing Tool

In-Class Translation Assistant

AI Note Generator

AI Quiz Answers

Past Exam Questions from University Test Bank

Smart Practice Assistant

Adaptive Practice

Making Your Study Simpler