If the marginal propensity to consume increases, the spending multiplier _____ and the balanced budget multiplier _____.
A) decreases; remains the same
B) increases; remains the same
C) increases; increases
D) decreases; decreases

Question

Quizplus · Accepted Answer

The spending multiplier increases because a higher marginal propensity to consume means that each dollar of income generates more spending. The balanced budget multiplier remains the same because it is always equal to 1, regardless of the marginal propensity to consume.

If the Marginal Propensity to Consume Increases, the Spending Multiplier