The larger the Marginal Propensity to Consume (MPC), the larger the effect of any change in income (such as from business taxes reducing investment) on aggregate demand, because a higher MPC means that consumers are more likely to spend additional income, amplifying the impact of changes in income on the economy.

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The Larger the MPC

Question 110

Multiple Choice

The larger the MPC:

A) the smaller the multiplier.
B) the smaller the effect of a given increase in government purchases on consumption purchases.
C) the larger the effect of business taxes which reduce investment on aggregate demand.
D) the less powerful changes in individual taxes will be in changing aggregate demand.

Correct Answer: