When prices are fixed and there are no imports or income taxes, the value of the multiplier is
A) less than one.
B) greater than one.
C) equal to one.
D) equal to zero.

Question

Quizplus · Accepted Answer

When prices are fixed and there are no imports or income taxes, the economy operates under a simplified Keynesian framework. In this scenario, any increase in spending leads to a more than proportional increase in income, due to the multiplier effect. The multiplier is calculated as 1/(1-MPC), where MPC is the marginal propensity to consume. Since 0 < MPC < 1, the multiplier is always greater than one.

When Prices Are Fixed and There Are No Imports or Income