When the MPC gets smaller, the spending multiplier:
A) gets larger.
B) gets smaller.
C) stays the same.
D) gets smaller at low real GDP, and larger at high real GDP.
E) gets larger at low real GDP, and smaller at high real GDP.

Question

Quizplus · Accepted Answer

The spending multiplier is calculated as 1/(1-MPC). As the MPC (marginal propensity to consume) gets smaller, the denominator gets larger, therefore the overall fraction gets smaller, meaning the spending multiplier gets smaller as well.

When the MPC Gets Smaller, the Spending Multiplier