Which of the following would increase the size of the government purchases multiplier?
A)an increase in the tax rate
B)an increase in the quantity of imports purchased by households from an increase in income
C)a decrease in the amount of consumption spending by households from an increase in income
D)a decrease in the amount saved by households from an increase in income

Question

Quizplus · Accepted Answer

The size of the government purchases multiplier is affected by the marginal propensity to consume (MPC). MPC is the fraction of additional income that is spent, rather than saved. If households save a smaller fraction of their income, then the MPC is larger, which increases the size of the government purchases multiplier. Choice D, which involves a decrease in the amount saved by households from an increase in income, would increase the MPC and therefore increase the size of the multiplier.

Which of the Following Would Increase the Size of the Government