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

Question

Quizplus · Accepted Answer

The spending multiplier increases because it is inversely related to the marginal propensity to save, which decreases when the marginal propensity to consume increases. 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