Which of the following is a true statement about the multiplier?
A)The formula for the multiplier overstates the real world multiplier when we take into account the impact of changes in GDP on imports,inflation and the interest rate.
B)The larger the MPC,the smaller the multiplier.
C)The multiplier is the ratio of the change in spending to the change in GDP.
D)The multiplier makes the economy less sensitive to changes in autonomous expenditure.

Question

Quizplus · Accepted Answer

The multiplier is affected by various factors, including imports, inflation, and interest rates. When GDP changes, these factors also change, which can dampen the effect of the initial spending change, making the theoretical multiplier larger than what is observed in the real world. The multiplier is actually the ratio of the change in GDP to the change in spending, not the other way around, and a larger marginal propensity to consume (MPC) leads to a larger, not smaller, multiplier. The multiplier effect makes the economy more sensitive to changes in autonomous expenditure, not less.

Which of the Following Is a True Statement About the Multiplier