Which of the following about the multiplier is false?
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A. B. C. D.C
The multiplier is defined as M = 1/(1-MPC) rather than 1 / (1 - MPS).
The correct answer is C. It is false to say that the multiplier is defined as 1 / (1 - the marginal propensity to save).
The multiplier is an economic concept that measures the impact of changes in spending on overall economic output. When there is an increase in spending in an economy, it sets off a chain reaction of additional spending, which leads to a multiplied effect on the overall income or output of the economy. Similarly, a decrease in spending can have a multiplied negative effect.
Let's go through each answer choice and explain why it is true or false:
A. Idle resources are necessary before the multiplier can bring about an increase in real income. This statement is true. The multiplier effect relies on the presence of idle resources in the economy. Idle resources refer to unused or underutilized factors of production, such as unemployed labor or unused capital. When there are idle resources, an increase in spending can stimulate the utilization of these resources, leading to an increase in real income.
B. The size of the multiplier relates directly to the size of the marginal propensity to consume. This statement is true. The marginal propensity to consume (MPC) refers to the proportion of additional income that individuals or households spend rather than save. The higher the MPC, the larger the multiplier effect. This is because a higher MPC means that a larger portion of additional income will be spent, leading to more rounds of spending and increasing the overall impact on real income.
C. It is defined as 1 / (1 - the marginal propensity to save). This statement is false. The correct formula to calculate the multiplier is 1 / (1 - MPC), where MPC represents the marginal propensity to consume. The marginal propensity to save (MPS) is the proportion of additional income that individuals or households save rather than spend. The formula should be 1 / (1 - MPS).
D. It takes time for the multiplier to work. This statement is true. The multiplier effect does not occur instantaneously. It takes time for the increased spending to circulate through the economy and generate subsequent rounds of spending. The multiplier effect works through a series of rounds, with each round of spending leading to additional rounds of income and spending. The time required for the multiplier to fully work depends on various factors, such as the speed of transactions and the nature of the economy.
In summary, the false statement regarding the multiplier is C. The correct formula for the multiplier is 1 / (1 - MPC), not 1 / (1 - MPS).