The use of 1/MPS formula as the size of the multiplier in the economy, overstates the actual size of it because:
A)saving is not the only fraction of the domestic income which is not spent.
B)saving is the only fraction of the domestic income which is not spent.
C)imports and taxes create new income in the economy.
D)imports and not taxes creates new income in the economy.

Question

Quizplus · Accepted Answer

The use of 1/MPS formula assumes that all income which is not spent on consumption is saved, which is not necessarily true. There are other factors such as investment and government spending which can affect how income is used. Therefore, the actual size of the multiplier may be lower than what is calculated using the 1/MPS formula.

The Use of 1/MPS Formula as the Size of the Multiplier