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Homework answers / question archive / Does an increase in the size of the marginal propensity to consume have the effect of increasing, decreasing, or not changing the size of autonomous spending multipliers (that is, the investment or government spending multiplier)? (Points : 3) -Increases the size of the multipliers -Decreases the size of the multipliers -Does not affect the size of the multipliers
Does an increase in the size of the marginal propensity to consume have the effect of increasing, decreasing, or not changing the size of autonomous spending multipliers (that is, the investment or government spending multiplier)? (Points : 3)
Let us start with the fundamental macroeconomic equation
GDP = national income = y = C+ G+I + X-M
In this equation y is also called aggregate output
And RHS altogether is call Aggregate demand
Where
C = consumption = a + by
I= autonomous investment
G= government spending
Where b=Marginal propensity to consume or MPC
As we can see if MPC increases then C i.e. consumption will increase which will increase the Aggregate demand side( i.e. RHS of the equation ), now to meet this demand Aggregate output has to rise there are two components or Aggregate output
1) price: if Agg. Output rises because of rise in price then this will lead to inflation if happens because of supply bottlenecks and to remove this Government spending needs to be increased along with the increase in investments in capacity installation by firms and if investments and government spending increasw then their multiplier will also increase.
2) quantity of goods and service: if Agg. Output rise because of rise in this component then it will amount to growth. In this case there is no further need for investment etc.
