Question

# Which of the following statements is/are true in a closed economy with government where consumers save...

Which of the following statements is/are true in a closed economy with government where consumers save a part of their disposable income?

Select one:

a. The expenditure multiplier is always between 0 and 1.

b. The expenditure multiplier is always greater than 1.

c. The expenditure multiplier can vary from 0 to a number greater than 1.

d. None of the other answers are correct.

e. The expenditure multiplier is always less than the tax multiplier.

b. The expenditure multiplier is always greater than 1.

​​​​​​It is given that the consumers save a part of their disposable income. So, if the income of consumers increases, the consumers save a part of that increaed income.

Marginal propensity to save (MPS) is the change in savings for a given change in disposable income.

So, MPS =

Change in savings/change in disposable income

We know that consumers save only a part of disposable income. So,

change in savings > change in disposable income.

So 0 < MPS < 1

Expenditure multiplier = 1/MPS

0 < MPS < 1 -----> 1/MPS > 1

So, when consumers save a part of their disposable income, expenditure multiplier is always greater than 1.

So, option b is correct.

[ Tax multiplier = -(1-MPS)/MPS. It may or may not be greater than expenditure multiplier. So, the option d is incorrect.]

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