Question
Why does a higher MPC make the spending multiplier larger?
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Answer
Less income leaks into saving, so more re-spending occurs.
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Question
What does MPS measure in fiscal multiplier analysis?
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Answer
The fraction of extra income that households save.
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Question
What does MPC measure in fiscal multiplier analysis?
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Answer
The fraction of extra income that households spend.
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Question
What is the government spending multiplier formula in terms of MPC and MPS?
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Answer
rac11−extMPC=rac1extMPS.
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