When there are few unemployed resources, additional spending will tend to
A) flow directly to the unemployed resources, so that the multiplier can be maintained at 1/1-mpc.
B) increase the marginal propensity to consume, and thereby increase the size of the multiplier.
C) increase the demand for resources and drive prices downward, increasing the size of the multiplier.
D) bid resources away from other activities and drive prices upward, reducing the size of the multiplier.

Question

Quizplus · Accepted Answer

When there are few unemployed resources, additional spending will bid resources away from other activities and drive prices upward, reducing the size of the multiplier. This is because the resources are already employed and any additional demand will lead to an increase in their scarcity and an upward pressure on their prices. As a result, the cost of production will increase, reducing the profitability of investments and lowering the size of the multiplier.

When There Are Few Unemployed Resources, Additional Spending Will Tend