In an economy with no taxation and no external trade, the size of the multiplier depends on:Select one correct answerGroup of answer choicesThe marginal propensity to consume.The current level of aggregate demand.Investment.Autonomous consumption.
Question
In an economy with no taxation and no external trade, the size of the multiplier depends on:Select one correct answerGroup of answer choicesThe marginal propensity to consume.The current level of aggregate demand.Investment.Autonomous consumption.
Solution
The size of the multiplier in an economy with no taxation and no external trade depends on the marginal propensity to consume.
Here's why:
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The multiplier effect refers to the increase in final income arising from any new injection of spending.
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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).
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If households in an economy save a larger proportion of their income, the size of the multiplier will be smaller. On the other hand, if households spend a larger proportion of their income, the multiplier will be larger.
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The marginal propensity to consume is the increase in consumer spending due to an increase in income. This means that if income increases, consumption also increases, leading to an increase in aggregate demand.
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Therefore, in an economy with no taxation and no external trade, the size of the multiplier depends on the marginal propensity to consume.
The current level of aggregate demand, investment, and autonomous consumption do not directly determine the size of the multiplier in this context.
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