Question

As the marginal propensity to consume (MPC) increases, the multiplier:

A. remains the same
B. decreases
C. increases.

As the marginal propensity to save (MPS) increases, the multiplier:

A. remains the same
B. increases
C decreases.

Answer 1

As MPC increases, the multiplier increases

So as MPS increases the multiplier decreases.

Step-by-step explanation:

The the expenditure multiplier is the amount by which the aggregate output would increase with an increase in any of the expenditure components.

It is calculated as follows;

Multiplier = 1/(1-MPC)

For example, MPC of 0.6 and 0.8 would produce multipliers of

2.5 and 5 respectively.

Therefore as MPC increases, the multiplier increases

On the other hand, the MPS is the 1- MPS, looking at the same equation, the multiplier is equal to

Multiplier = 1/MPS.

Therefore, MPS of 0.3 and 0.4 would produce the 3.33 and 2.5 respectively.

So as MPS increases the multiplier decreases.