Suppose the propensity to consume equals 0.83. Given this information, which of the following events will cause the largest decrease in output?

Question

Quizplus · Accepted Answer

The multiplier effect in economics suggests that a change in autonomous spending (like government spending, G) leads to a larger change in output. Given the propensity to consume (MPC) is 0.83, the multiplier is 1/(1-MPC) = 1/(1-0.83) = 5.88. A decrease in G by 400 would have the largest negative multiplier effect on output, making option A correct.

Suppose the Propensity to Consume Equals 0