Discuss and explain what effect a reduction in the marginal propensity to consume has on the size of the multiplier
What will be an ideal response?
A reduction in the marginal propensity to consume will cause a reduction in the multiplier. When firms increase production in response to some initial change in demand, households will increase their consumption by a smaller amount when the mpc falls. So, the income-induced change in demand will be that much smaller causing a smaller multiplier effect.
You might also like to view...
Refer to the above figure. The top two arrows of the figure refer to the product markets. The bottom arrows refer to the factor markets. Which arrow represents the final consumer goods and services?
A) Arrow A B) Arrow B C) Arrow C D) Arrow D
Information technologies ________ the demand for low-skilled labor, increase the ________ high-skilled labor, lower the wage rate of ________ labor, and raise the wage rate of ________ labor
A) decrease; demand for; low-skilled; high-skilled B) decrease; supply of; low-skilled; high-skilled C) do not change; supply of; high-skilled; low-skilled D) do not change; demand for; high-skilled; low-skilled
An unintended consequence of rent control has been
a. apartment owners failing to properly maintain their buildings b. a surplus of housing causing rents to fall below maintenance cost c. that rents have been consistently held above the equilibrium price d. a shortage of tenants e. a decrease in the homeless population
If the price of inputs rises and foreign income rises:
a. Price index falls, and real GDP rises. b. Price index falls, and real GDP falls. c. Price index falls, and the change in real GDP is uncertain. d. Price index rises, and the change in real GDP is uncertain. e. The change in price index is uncertain, and real GDP falls.