ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -When marginal propensity to consume increases, it means that with the rise in consumer income their consumption also increases. As consumers spend more, the spending multiplier increases.

Detailed explanation-2: -An increase in the marginal propensity to consume means that a higher portion of people’s income will be spent rather than saved, which in turn increases the multiplier since there is more stimulus provided by spending income.

Detailed explanation-3: -An increase in marginal propensity to consume, or c1, will in fact increase the multiplier (so A is wrong). An increase in marginal propensity to save, defined as 1-c1, will decrease the multiplier. (c0 + I + G-c1T), it can be seen that either an increase in G or a decrease in T could increase aggregate output Y.

Detailed explanation-4: -The magnitude of the multiplier is directly related to the marginal propensity to consume (MPC), which is defined as the proportion of an increase in income that gets spent on consumption. For example, if consumers save 20% of new income and spend the rest, then their MPC would be 0.8 (1-0.2).

Detailed explanation-5: -An increase in marginal propensity to consume or equivalently a fall in marginal propensity to save increases the consumption expenditure and thus the multiplier.