What is the effect of an increase in the MPM?
A)The MLR will increase and the multiplier will increase.
B)The MLR will decrease and the multiplier will increase.
C)The MLR will increase and the multiplier will decrease.
D)The MLR will decrease and the multiplier will decrease.
E)The MLR will remain the same but the multiplier will increase.

Question

Quizplus · Accepted Answer

An increase in the MPM (marginal propensity to import) means that a greater proportion of an increase in income will be spent on imports rather than domestic goods, lowering the value of the multiplier. Additionally, this will increase the MLR (marginal propensity to leak) as more money is leaving the circular flow of income.

What Is the Effect of an Increase in the MPM