As the marginal propensity to consume (MPC) decreases, the spending multiplier
A) increases.
B) decreases.
C) remains constant.
D) becomes indefinable.

Question

Quizplus · Accepted Answer

The spending multiplier is determined by the formula 1/MPS (where MPS is the marginal propensity to save). As MPC + MPS = 1, then we know that as the MPC decreases, the MPS increases. This means that the denominator in the spending multiplier formula gets larger, resulting in a smaller spending multiplier. Therefore, as the MPC decreases, the spending multiplier decreases.

As the Marginal Propensity to Consume (MPC) Decreases, the Spending