Why the size of the marginal propensity to consume determines the magnitude of the multiplier effect
When households spend a larger share of any extra income they receive, each round of the multiplier process passes on more money. A higher marginal propensity to consume therefore produces a bigger final rise in national income.
Formula
Multiplier = 1 ÷ (1 − MPC)
Real World
After the 2008 crisis, UK households increased saving sharply, pushing the MPS up and MPC down — the multiplier effect of government stimulus was therefore weaker than in more confident economic times, undermining the impact of the £20 billion fiscal stimulus package.
Exam Focus
Directly link MPC to the multiplier formula with a numerical example; vague statements like 'higher MPC means bigger multiplier' without explanation rarely score high-band marks.
Price Elasticity of Demand
PED = % change in quantity demanded ÷ % change in price
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