Final answer:
An increase in the Marginal Expenditure Rate (MER) correspondingly increases the income-expenditure multiplier, resulting in a larger effect of initial spending on the overall economy.
Step-by-step explanation:
The income-expenditure multiplier in economics indicates how an initial change in spending (injection) leads to a larger change in income and aggregate output. It is closely related to the Marginal Propensity to Consume (MPC), which measures the fraction of additional income that is spent on consumption. When the MPC is high, the multiplier effect is stronger, meaning that income cycles through the economy more times.
To determine the income-expenditure multiplier, use the formula 1/(1 - MPC). If the Marginal Expenditure Rate (MER) increases, which is effectively the Marginal Propensity to Spend, the MPC also increases. This leads to a larger multiplier, as the formula suggests because a smaller portion of each dollar is saved, paid in taxes, or spent on imports, allowing more to be spent in the economy. Consequently, an increase in the MER will increase the income-expenditure multiplier.
Exercise B6/D6 asks about the axes of an expenditure-output diagram, which typically has aggregate expenditure on the vertical axis and aggregate output or income on the horizontal axis.