Consider a simple macro model with demand- determined output. In such a model, the larger the marginal propensity to spend, the
A)greater is investment.
B)larger the MPC.
C)larger the simple multiplier.
D)smaller the MPS.
E)smaller the simple multiplier.

Question

Quizplus · Accepted Answer

In a demand-determined model, the simple multiplier represents the effect of a change in autonomous spending on equilibrium output. The simple multiplier is derived as 1/(1-MPC). Therefore, the larger the MPC (marginal propensity to spend), the larger the simple multiplier, and the larger the effect of a change in autonomous spending on equilibrium output.

Consider a Simple Macro Model with Demand- Determined Output