Question

Flatter aggregate consumption function, if plotted on a graph with output on the horizontal axis and aggregate consumption on the vertical axis, would indicate which of the following:

a. A larger marginal propensity to consume and a larger multiplier.
b. A smaller marginal propensity to consume and a smaller multiplier.
c. A smaller marginal propensity to consume and a larger multiplier.
d. A smaller marginal propensity to save (MPS = 1 - MPC) and a smaller multiplier.

Answer 1

A flatter aggregate consumption function indicates a smaller marginal propensity to consume and therefore, a larger marginal propensity to save. Consequently, it corresponds to a larger, not smaller, multiplier effect.

Step-by-step explanation:

A flatter aggregate consumption function, if plotted on a graph with output on the horizontal axis and aggregate consumption on the vertical axis, would indicate a lower marginal propensity to consume (MPC). This is because a flatter slope in the consumption function represents a smaller increase in consumption for a given increase in national income. Consequently, this implies a larger marginal propensity to save (MPS), since MPS + MPC = 1. However, contrary to options a, b, and d, a lower MPC would entail a larger multiplier, not a smaller one.

Therefore, the correct answer to the student's question is c. A smaller marginal propensity to consume and a larger multiplier. This is because with a larger MPS (due to the smaller MPC), the initial change in spending will result in a larger series of spending rounds, thereby creating a larger multiplier effect.