An increase in the MPC
A)increases the multiplier,so that changes in government expenditures have a larger effect on aggregate demand.
B)increases the multiplier,so that changes in government expenditures have a smaller effect on aggregate demand.
C)decreases the multiplier,so that changes in government expenditures have a larger effect on aggregate demand.
D)decreases the multiplier,so that changes in government expenditures have a smaller effect on aggregate demand.

Question

Quizplus · Accepted Answer

MPC stands for marginal propensity to consume, which is the fraction of additional income that a household will spend on consumption. An increase in MPC means that households will spend a larger portion of their additional income on consumption. As a result, the multiplier effect (1/1-MPC) will increase, meaning that changes in government expenditures will have a larger effect on aggregate demand. This is because the increase in consumption spending by households will lead to further increases in spending by firms, creating a chain reaction of spending throughout the economy.

An Increase in the MPC