In a business cycle boom,we expect an unusually ________ proportion of actual income to be transitory,thus an unusually ________ MPC operating in the short run,which ________ the income multiplier for the short run.
A)high,low,reduces
B)high,low,increases
C)high,high,reduces
D)low,low,increases
E)low,high,reduces

Question

Quizplus · Accepted Answer

In a business cycle boom, the income earned by individuals is likely to be higher than usual, but might not be sustained in the long run. Hence, the proportion of actual income that is transitory is high. This makes people spend less in the short run as they save some portion of the transitory income for the future, causing the MPC to be low. Consequently, the income multiplier reduces as a result of lower MPC. Therefore, the best answer is A.

In a Business Cycle Boom,we Expect an Unusually ________ Proportion