The expenditure multiplier is smallest when the

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Quizplus · Accepted Answer

The expenditure multiplier is equal to 1/(1-MPC), where MPC is the marginal propensity to consume. When the LM curve is vertical, it means that the central bank is targeting a fixed interest rate and is willing to supply an unlimited amount of money to achieve that interest rate. In this case, changes in fiscal policy, which affect aggregate demand, do not have any effect on the interest rate or the level of output, as everything is determined by the monetary policy. Therefore, the MPC is zero and the expenditure multiplier is equal to 1, which is the smallest possible value.

The Expenditure Multiplier Is Smallest When the