If the marginal propensity to consume (MPC) increases, then
A) the marginal propensity to save (MPS) increases.
B) the multiplier increases.
C) the multiplier decreases.
D) MPC + MPS is less than 1.

Question

Quizplus · Accepted Answer

The MPC is the fraction of additional income that is spent on consumption. Therefore, if the MPC increases, then more of each additional dollar earned will be spent rather than saved. This leads to an increase in the multiplier, which measures the overall impact of a change in spending on the economy. The multiplier is calculated as 1/MPS, so an increase in MPC means a decrease in MPS and therefore a larger multiplier.

If the Marginal Propensity to Consume (MPC) Increases, Then