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

Question

Quizplus · Accepted Answer

The spending multiplier is given by 1/(1-MPC), which implies that as the MPC decreases, (1-MPC) increases, and thus the denominator of the multiplier increases. This means that the multiplier itself decreases, since it is the inverse of the denominator.

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