Question

All else being equal, a steeper planned aggregate expenditure function is consistent with

Group of answer choices

a smaller marginal propensity to consume and a smaller multiplier.

a smaller marginal propensity to consume and a larger multiplier.

a larger marginal propensity to consume and a larger multiplier.

a larger marginal propensity to consume and a smaller multiplier.

Answer 1

The slope of the planned aggregate expenditure line is MPC for closed economy. The larger the MPC ,this means the larger the slope of the AE line which implies that steeper planned AE function. And multiplier = 1/1-MPC , so , the larger MPC means larger the multiplier and which in turn implies the steeper planned AE function. Hence, option(C) is correct i.e a larger marginal propensity to consume and a larger multiplier is consistent for steeper planned aggregate expenditur function.