ECONOMICS
AGGREGATE DEMAND
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Raises the value of the multiplier
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Lowers the value of the multiplier.
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Has no impact on the value of the multiplier.
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Rarely occurs because the MPC is set by congressional legislation.
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Detailed explanation-1: -In Keynesian macroeconomic theory, the marginal propensity to consume is a key variable in showing the multiplier effect of economic stimulus spending. Specifically, it suggests that a boost in government spending will increase consumer income, and in turn, consumer spending will rise.
Detailed explanation-2: -The amount of the marginal propensity to consume, therefore, contributes to the multiplier effect because extra income leads to extra demands and/or spending and creates more income. This increase in income because of the new injection, or spending, is the multiplier effect.
Detailed explanation-3: -For a maximum value of MPC, there is a maximum value of multiplier (infinity) For a minimum value of MPC (0), there is a minimum value of multiplier (1). As the MPC increases, there is also an increase in the multiplier and vice-versa. Therefore, there is a positive relationship between MPC and multiplier.