Multipliers will be lower with which one of the following?
- A.High marginal propensity to consume
- B.Low marginal propensity to consume
- C.High marginal propensity to invest
- D.Low marginal propensity to save
Correct answer
Explanation
The correct answer is B, Low marginal propensity to consume. The investment multiplier equals 1 ÷ (1 − MPC), so the smaller the share of extra income people spend, the smaller the multiplier.
The Keynesian multiplier shows how a rise in investment raises national income by a larger amount, because each round of spending becomes someone else's income, part of which is spent again. If the marginal propensity to consume is 0.8, the multiplier is 1 ÷ 0.2 = 5; if MPC is only 0.5, it is 1 ÷ 0.5 = 2. Since MPC + MPS = 1, the multiplier can also be written as 1 ÷ MPS: more saving means more leakage and a weaker multiplier.
A is wrong because a high MPC makes each round of spending larger and raises the multiplier. C is wrong because a high propensity to invest adds more spending in each round, which also strengthens it. D is wrong because a low marginal propensity to save means a high MPC, and therefore a higher multiplier.
Exam tip: multiplier k = 1 ÷ (1 − MPC) = 1 ÷ MPS; MPC up, k up; MPS up, k down.
Practice Questions
View allConsider the following statements about 'Ude Desh ka Aam Nagrik (UDAN)' scheme :
1. It is an innovative scheme to develop the regional aviation market.
2. It creates affordability yet economically viable and profitable flight on regional routes.
Which of the statements given above is/are correct?
- A.1 only
- B.2 only
- C.Both 1 and 2
- D.Neither 1 nor 2
Show answer
UDAN is the regional connectivity scheme meant to grow regional air travel and make it affordable while keeping the routes viable for airlines.
Read the full explanation →Which one of the following Five-Year Plan documents was titled as "Towards Faster and More Inclusive Growth"?
- A.Eighth Plan
- B.Ninth Plan
- C.Tenth Plan
- D.Eleventh Plan
Show answer
The Eleventh Five-Year Plan (2007–2012) carried the title "Towards Faster and More Inclusive Growth". The Eleventh Plan was prepared by the Planning Commission under Prime Minister Manmohan Singh, with Montek Singh Ahluwalia as Deputy Chairman.
Read the full explanation →The Fourteenth Finance Commission assigned different weights to the following parameters for distribution of tax proceeds to the States :
1. Income distance
2. Population
3. Demographic changes
4. Area
Arrange the aforesaid parameters in descending order in terms of their weights.
- A.1-2-3-4
- B.1-2-4-3
- C.1-3-2-4
- D.4-3-2-1
Show answer
Income distance had the highest weight, followed by population, area and demographic change. The Fourteenth Finance Commission, chaired by Y.V.
Read the full explanation →Which one of the following statements for a firm's equilibrium in Perfect Competition is not correct ?
- A.The market price must be greater or equal to average variable cost in the short run.
- B.The market price must be equal to marginal cost.
- C.The market price must be equal to average cost in the long run.
- D.The marginal cost decreases at the equilibrium output.
Show answer
This statement is not correct, because at the equilibrium of a competitive firm marginal cost must be rising. A firm in perfect competition is a price taker, so the price it gets equals its marginal revenue.
Read the full explanation →Plan allocation in agriculture and irrigation as percentage of total plan outlay was highest in :
- A.Seventh Five-Year Plan
- B.Third Five-Year Plan
- C.First Five-Year Plan
- D.Second Five-Year Plan
Show answer
The First Plan (1951 to 1956) gave agriculture, community development and irrigation about a third of its outlay, the highest share in any Indian plan.
Read the full explanation →