With a consumption function of the form C = a + bY_D,which of the following would best measure how much a recession will spread? A)Parameter a. B)Parameter b. C)Variable Y_D. D)1 ÷ (1 - b).

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Quizplus · Accepted Answer

Parameter b represents the change in consumption for a change in income, but it does not directly measure the spread of a recession. Variable Y_D. represents the level of income and other factors that affect consumption, but it also does not directly measure the spread of a recession. Parameter a represents the autonomous consumption that is independent of income, but it also does not directly measure the spread of a recession. The expression 1 ÷ (1 - b) represents the multiplier effect, which indicates how much a change in income will affect consumption. In a recession, a decrease in income will lead to a decrease in consumption, which will further decrease income and consumption in a cascading effect. Therefore, a larger multiplier indicates a greater potential for the recession to spread. Thus the best choice is D, as it directly measures the multiplier effect.

With a Consumption Function of the Form C = a