Fiscal policy becomes more powerful in changing the level of output as
A)investment becomes more interest elastic
B)money demand becomes more interest inelastic
C)money demand becomes more income elastic
D)the marginal propensity to save gets smaller
E)the marginal propensity to consume gets smaller

Question

Quizplus · Accepted Answer

Fiscal policy involves changes in government spending and/or taxation, which can influence aggregate demand and ultimately affect the level of output. The marginal propensity to save refers to the portion of additional income that is saved, rather than spent, and as this value gets smaller, it means that more of each additional dollar of income is being spent. This implies that fiscal policy will have a greater impact on output, as more of the stimulus will translate into increased consumption and investment. Therefore, option D is the correct choice.

Fiscal Policy Becomes More Powerful in Changing the Level of Output