This economics question tests your understanding of economic models and analysis. The step-by-step answer below applies the relevant framework and explains the reasoning.
ScanSolve AI Answer
The multiplier in economics is a concept that quantifies the total change in real GDP caused by an autonomous change in aggregate spending. Step 1: Recall the formula for the simple expenditure multiplier. The formula for the simple expenditure multiplier (k) is: k = (1)/(1 - MPC) where MPC is the Marginal Propensity to Consume. Step 2: Analyze the relationship between MPC and the multiplier. The formula shows that the multiplier is inversely related to (1 - MPC). This term (1 - MPC) is also known as the Marginal Propensity to Save (MPS). So, k = (1)/(MPS). Step 3: Determine the effect of a decrease in MPC on the multiplier. If MPC decreases: The value of (1 - MPC) will increase* (since a smaller number is being subtracted from 1). Since (1 - MPC) is in the denominator of the multiplier formula, an increase in the denominator will lead to a decrease* in the overall value of the fraction. Therefore, if MPC decreases, the multiplier size decreases. Step 4: Select the correct option. Based on the analysis, if MPC decreases, the multiplier size decreases. The final answer is a. decreases. That's 2 down. 3 left today — send the next one.