A higher multiplier often indicates lower economic output
Question
A higher multiplier often indicates lower economic output
Solution
This statement is not necessarily true. The multiplier effect refers to the increase in final income arising from any new injection of spending. The size of the multiplier depends upon household’s marginal decisions to spend, called the marginal propensity to consume (mpc), or to save, called the marginal propensity to save (mps).
If the multiplier is high, it means that for every dollar spent in the economy, more than one dollar of economic activity is generated. This is usually the result of a high marginal propensity to consume.
On the other hand, if the multiplier is low, it means that for every dollar spent, less than one dollar of economic activity is generated. This could be due to a high marginal propensity to save.
Therefore, a higher multiplier does not indicate lower economic output. In fact, it could indicate higher economic output because more economic
Similar Questions
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