Assume an economy experiences, for a given period, a 1 increase ...

[michelleunicorn]

Assume an economy experiences, for a given period, a 1 increase in output and a 5 increase in productivity. Given this information, we know that which of the following occurred for this economy during this period?
 
  A) The unemployment rate increased during this period.
  B) The unemployment rate decreased during this period.
  C) The unemployment rate did not change during this period.
  D) The effects on the unemployment rate are ambiguous.
  E) none of the above

Question 2

Discuss and explain what effect a reduction in the marginal propensity to consume has on the size of the multiplier.
 
  What will be an ideal response?

[Anton]

Answer to Question 1

A

Answer to Question 2

A reduction in the marginal propensity to consume will cause a reduction in the multiplier. When firms increase production in response to some initial change in demand, households will increase their consumption by a smaller amount when the mpc falls. So, the income-induced change in demand will be that much smaller causing a smaller multiplier effect.