Question

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

Answer 1

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.