A rise in the marginal propensity to consume:
(i) shifts the aggregate expenditure function downward.
(ii) implies a fall in the proportion of income people save when their incomes change.
(iii) will decrease the level of equilibrium GDP.
(iv) will increase the slope of the aggregate expenditure function.
A)(i) and (ii)
B)(ii) and (iii)
C)(i) and (iv)
D)(ii) and (iv)

Question

Quizplus · Accepted Answer

Option (i) is incorrect because an increase in marginal propensity to consume would lead to an upward shift in the aggregate expenditure function.
Option (ii) is correct because an increase in marginal propensity to consume means that people would save a smaller proportion of their income, hence increasing consumption.
Option (iii) is correct because a rise in marginal propensity to consume would mean an increase in aggregate demand, causing an increase in equilibrium GDP.
Option (iv) is correct because an increase in marginal propensity to consume would make the aggregate expenditure function steeper.

A Rise in the Marginal Propensity to Consume