In 2009 President Obama and Congress increased government spending.Some economists thought this increase would have little effect on output.Which of the following would make the effect of an increase in government expenditures on aggregate demand smaller?

Question

Quizplus · Accepted Answer

If the marginal propensity to consume (MPC) is small, it means that consumers are likely to save rather than spend additional income, reducing the multiplier effect of government spending. Additionally, if changes in the interest rate have a large effect on investment, it implies that any increase in government spending could lead to higher interest rates, which would crowd out private investment, further diminishing the impact on aggregate demand.

In 2009 President Obama and Congress Increased Government Spending