ECONOMICS
AGGREGATE DEMAND
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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increase
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decrease
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Either A or B
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None of the above
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Detailed explanation-1: -If the marginal propensity to save decreases, the value of the multiplier will increase.
Detailed explanation-2: -Relationship between multiplier and MPSSince K = 1 / MPS so the value of multiplier varies inversely with the value of MPS. Higher the value of MPS the smaller will be the value of multiplier and lower the value of MPS; the larger will be the value of multiplier.
Detailed explanation-3: -The multiplier effect is the magnified increase in equilibrium GDP that occurs when any component of aggregate expenditures changes. The greater the MPC (the smaller the MPS), the greater the multiplier.
Detailed explanation-4: -If MPC increases, the value of multiplier will increase.
Detailed explanation-5: -You should test the equation to prove to yourself that the higher the MPC of a country, the greater the multiplier effect for changes in GDP! The factor 1/(1 − MPC) is called the multiplier. If a question tells you that the multiplier is 2.5, that means: Change in GDP = 2.5 × Change in AD.