Which of the following must be true to have a closed economy…

Question

Which of the following must be true to have a closed economy with no government, and yet the value of the investmet multiplier still increase?

Answer 1

Which of the following must be true to have a closed economy with no government, and yet the value of the investmet multiplier still increase?

Actual saving has fallen
Marginal propensity to save has fallen ✓
Actual investment had fallen
Average propensity to invest has fallen

Explanation

In a closed economy with no government, multiplier = 1 ÷ MPS.

If the marginal propensity to save has fallen, the denominator is smaller, so the multiplier is larger. Less leaks out as saving, and more is spent again.

Was this explanation helpful?

Something wrong or missing? Tell us — we read every report and fix issues fast.