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

Question

Quizplus · Accepted Answer

In a demand-determined output model, the simple multiplier formula is 1/(1-MPC), where MPC is the marginal propensity to consume. Therefore, the smaller the MPC, the larger the denominator of the formula, resulting in a smaller value for the overall multiplier.

Consider a Simple Macro Model with Demand- Determined Output