The spending multiplier grows _______ as the marginal propensity to consume _______.
A) larger; increases
B) larger; decreases
C) smaller; increases
D) smaller; stays the same

Question

Quizplus · Accepted Answer

As the marginal propensity to consume (MPC) increases, the amount spent by consumers out of each additional dollar of income increases as well. This leads to higher levels of consumption and ultimately higher levels of overall spending in the economy. As a result, the spending multiplier grows larger.

The Spending Multiplier Grows _______ as the Marginal Propensity to Consume