The size of the expenditure multiplier

Question

Quizplus · Accepted Answer

The expenditure multiplier is calculated as 1/MPS (where MPS is marginal propensity to save). As MPS decreases, the value of the multiplier increases. Therefore, option C is correct. Option A is partially correct as the multiplier also changes with a change in investment spending, but this is not the only factor affecting the multiplier. Option B is incorrect as the multiplier decreases as MPS increases. Option D is also incorrect as the multiplier decreases as the income tax rate increases. Option E is vague as it does not specify how the APC (average propensity to consume) affects the multiplier.

The Size of the Expenditure Multiplier