Answer to Question #110296 in Macroeconomics for Anshika

Question

What would happen to multiplier and output if propensity to consume is greater than one

Answer 1

When propensity to consume is greater than one, it means that the product relates to “luxury goods,” and the subject borrowed money or dissaved to finance expenditures higher than their income. For such goods little changes in income will lead to significantly bigger changes in their consumption. With the growth of consumption the production also will increase.