PRC-3 · Chapter 15 · Question 11 of 44
If a nation's citizens decide to suddenly save a massive portion of their income out of fear of a recession, causing the Marginal Propensity to Consume (MPC) to drop significantly. What happens to the size of the Multiplier?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) It decreases
Explanation
The formula for the multiplier is 1 / (1 - MPC). If the MPC drops (people spend less and save more), the multiplier effect weakens and the value of the multiplier decreases.
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