Question 21

People spend more when MPC increases, leading to a higher spending multiplier.

An increase in the marginal propensity to consume (MPC) means that individuals are inclined to spend a larger portion of any additional income they receive. This behavior amplifies the overall impact on the economy, resulting in a higher spending multiplier.

A) People save more

This option is incorrect because an increase in the MPC indicates that people are saving less of their additional income. If individuals save more, it would imply a lower MPC, resulting in a smaller spending multiplier, not a larger one.

B) People save less

While this option is partially correct, it does not directly address the question's focus on the spending multiplier. Saving less does correlate with a higher MPC, but it is the act of spending more that directly contributes to the increase in the spending multiplier.

C) People spend more

This is the correct answer as an increase in the MPC signifies that individuals are spending a greater proportion of their income. The more people spend, the greater the multiplier effect on economic activity, leading to a higher overall impact.

D) MPS = 1 - MPC

This statement reflects the relationship between the marginal propensity to save (MPS) and the marginal propensity to consume (MPC) but does not explain why an increase in the MPC leads to a higher spending multiplier. Therefore, it is not directly relevant to the question.

Conclusion

The correct answer is C, as it highlights the essential relationship between increased consumer spending and the spending multiplier effect. Options A and B misinterpret the implications of MPC, while D provides a formulaic relationship that does not address the core of the question. The focus on increased spending is what drives the multiplier effect in economic terms.