Final answer:
The spending multiplier is affected by how much consumers spend or save of their income. A greater tendency to consume leads to a larger spending multiplier, while a greater tendency to save, higher taxes, or more spending on imports decrease it.
Step-by-step explanation:
The spending multiplier's size will be influenced by various factors that can either increase or decrease it. Here's how the characteristics mentioned will affect the multiplier:
- A greater marginal propensity to consume (MPC): A higher MPC means that more of each dollar received by consumers is spent rather than saved, leading to a larger spending multiplier.
- A greater marginal propensity to save (MPS): A higher MPS indicates that more money is saved, which reduces the flow of spending through the economy, resulting in a smaller spending multiplier.
- Low income tax rate: Lower taxes increase disposable income, implying that more money can be spent, which usually increases the spending multiplier.
- Low percentage of income spent on imports: Fewer imports mean that more of the spending remains within the domestic economy, thereby increasing the spending multiplier.
- A large amount of exports: Exports represent an injection into the economy. While not directly influencing MPC, higher exports can increase overall demand and potentially lead to a higher spending multiplier, although the multiplier effect relates more directly to domestic spending habits.
To summarize, the greater the fraction of each dollar spent domestically, the larger the spending multiplier becomes. Conversely, the more money saved, taxed, or spent on imports, the smaller the multiplier effect.