Question #220252
b) State whether the following statements are
TRUE or FALSE. Give reason(s) in support
of your answer. 5
i. Higher the marginal propensity to consume,
higher is the size of multiplier
ii. If investment is very sensitive to interest rate,
then we have a flat IS curve
TRUE or FALSE. Give reason(s) in support
of your answer. 5
i. Higher the marginal propensity to consume,
higher is the size of multiplier
ii. If investment is very sensitive to interest rate,
then we have a flat IS curve
Expert's answer
I) TRUE
The greater the increase in consumption as a result of increased investment, the more economists may use the MPC to predict the entire impact of a future increase in earnings.
ii) TRUE
The slope of the IS curve will be steeper if the interest sensitivity of consumption is greater than the interest sensitivity of investment.
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