The multiplier is defined as the ratio of the total change in real GDP to the size of the autonomous change in aggregate spending.

The multiplier is defined as the ratio of the total change in real GDP to the size of the autonomous change in aggregate spending.

• A. True
• B. False
• C. It is equal to the marginal propensity to save.
• D. It only applies to government spending.

Answer: (A)

The idea in play is the spending multiplier: an initial autonomous change in aggregate spending starts a chain reaction of income and spending rounds, so the total rise in real GDP is larger than the initial change. By definition, the multiplier is the ratio of the total change in real GDP to the size of the autonomous change in aggregate spending. So the statement is true. The multiplier can be written as 1/(1 − MPC) or equivalently 1/MPS, since MPS = 1 − MPC. It’s not simply the marginal propensity to save itself, but the whole multiplier that captures how extra spending circulates through the economy. And it isn’t restricted to government spending—any autonomous spending change (like investment or exports) can generate the multiplier effect. For example, with an MPC of 0.8, the multiplier is 5, so a $100 autonomous increase would raise real GDP by about $500.

The idea in play is the spending multiplier: an initial autonomous change in aggregate spending starts a chain reaction of income and spending rounds, so the total rise in real GDP is larger than the initial change. By definition, the multiplier is the ratio of the total change in real GDP to the size of the autonomous change in aggregate spending. So the statement is true. The multiplier can be written as 1/(1 − MPC) or equivalently 1/MPS, since MPS = 1 − MPC. It’s not simply the marginal propensity to save itself, but the whole multiplier that captures how extra spending circulates through the economy. And it isn’t restricted to government spending—any autonomous spending change (like investment or exports) can generate the multiplier effect. For example, with an MPC of 0.8, the multiplier is 5, so a $100 autonomous increase would raise real GDP by about $500.