When households' marginal propensity to consume (MPC) increases, the size of the spending multiplier:
A) also increases.
B) decreases.
C) remains unchanged.
D) reacts unpredictably.

Question

Quizplus · Accepted Answer

The spending multiplier represents how much total spending in the economy changes in response to a change in autonomous spending (such as a change in government spending or investment). It is calculated as 1/(1-MPC). As the MPC increases, the denominator (1-MPC) decreases, which in turn increases the value of the multiplier. Therefore, the size of the spending multiplier increases when households' MPC increases.

When Households' Marginal Propensity to Consume (MPC) Increases, the Size