Question

True or False. Larger MPCs imply larger multipliers.

Short answer

The statement is true.

Step-by-step solution

Meaning of multiplier and MPC

A multiplier is the ratio of change in income to change in total spending.It explains that a change in total spending induces how much change in the total income, or by what rate a change in total spending induces the income changes.

The formula for the multiplier (k) is as follows:

$k=\frac{△Y}{△Expenditure}$

Marginal propensity to consume denotes what proportion of total income is consumed by the private individuals.

Reason for the true statement

A larger value of MPC means a smaller value of MPS. As people tend to save less and spend more, the consumption expenditure increases. A greater proportion of income is consumed, and, therefore, the increase in income is greater. This means the value of the multiplier increases.

$k=\frac{1}{1-MPC}$

Therefore, a larger MPC means a larger multiplier.