The simple multiplier 1/MPS:
A) Understates the actual multiplier because it includes leakages in domestic spending from the purchase of imports or the paying of taxes
B) Understates the actual multiplier because it excludes leakages in domestic spending from the purchase of imports or the paying of taxes
C) Overstates the actual multiplier because it includes leakages in domestic spending from the purchase of imports or the paying of taxes
D) Overstates the actual multiplier because it excludes leakages in domestic spending from the purchase of imports or the paying of taxes

Question

Quizplus · Accepted Answer

The simple multiplier 1/MPS overstates the actual multiplier because it does not account for leakages such as imports and taxes, which reduce the impact of initial spending on the overall economy.

The Simple Multiplier 1/MPS