In the IS-MP model, if the marginal propensity to consume increases, then in equilibrium:
A)Investment decreases.
B)The real interest rate rises.
C)output increases.
D)all of the above.

Question

Quizplus · Accepted Answer

According to the IS-MP model, an increase in the marginal propensity to consume (MPC) leads to an increase in aggregate demand, shifting the IS curve to the right. This results in a higher equilibrium output level. The MP curve represents the combination of real interest rates and output levels that achieve monetary policy equilibrium, and is upward sloping. Therefore, the increase in output will cause the real interest rate to rise, but this is not the case in the short-run as monetary policy may not adjust immediately. Investment is not affected by the increase in MPC, so option A is incorrect. Therefore, the correct answer is C: output increases.

In the IS-MP Model, If the Marginal Propensity to Consume