Question

An increase in the MPC

a. increases the multiplier, so that changes in government expenditures have a larger effect on aggregate demand.
b. increases the multiplier, so that changes in government expenditures have a smaller effect on aggregate demand.
c. decreases the multiplier, so that changes in government expenditures have a larger effect on aggregate demand.

Answer 1

The correct answer is option a.

Step-by-step explanation:

MPC or marginal propensity to consume measures the change in consumption due to change in the income level of the consumer. It is the ratio of the percentage change in consumption to the percentage change in income.

The multiplier shows the extent to which the aggregate demand will change due to a change in government spending.

The multiplier is expressed as,

`(1)/(1-MPC)`

An increase in the MPC thus increases the value of the multiplier. The greater the multiplier the greater will be the change in the aggregate demand due to a change in government spending.