55. If households in the economy save more of any extra income that they earn, then the multiplier effect will

A. increase.
B. decrease.
C. be unaffected.
D. become less than 1.0.

Question

55. If households in the economy save more of any extra income that they earn, then the multiplier effect will

A.  increase.
B. decrease.
C. be unaffected.
D. become less than 1.0.

BlackTom AI · Accepted Answer

When households save more of any extra income, the marginal propensity to consume (MPC) falls because a larger share of income is saved rather than spent on goods and services.
Option A: 'increase.' If the MPC falls, the spending multiplier, which sits on the denominator as 1 - MPC in the simple model, actually decreases, not increases. So this option misstates the effect of higher saving.
Option B: 'decrease.' This is the correct intuition: a lower MPC reduces the amount of additional spending generated by a given increment of autonomous spending, thereby shrinking the multiplier.
Option C: 'be unaffected.' The multiplier is directly tied to MPC; changing saving behavior changes MPC, so the multiplier cannot remain unchanged.
Option D: 'become less than 1.0.' In the standard simple multiplier formula, the multiplier = 1/(1 - MPC) is greater than 1 when MPC is positive and less than 1 only if MPC is zero or negative. A typical increase in saving lowers MPC but does not inherently push the multiplier below 1; the precise value depends on MPC, but the general effect of more saving is a smaller multiplier, not necessarily a multiplier below 1. Thus this statement is not a general description of the outcome.

ECNM1115.32542.202530 Spring 2025 Test 3 March 28

55. If households in the economy save more of any extra income that they earn, then the multiplier effect will A. increase. B. decrease. C. be unaffected. D. become less than 1.0.

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