Answer to Question #221267 in Macroeconomics for Himanshu

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

1. False. MPC equals (total consumption less c0) divided by disposable income. This answer would be true if c0 were equal to 0. But, since, in the real world, this is not a valid assumption, this answer is false. 
2. True. If an investment is susceptible to the interest rate, then a slight decline in the interest rate will increase investment significantly. Therefore, the IS curve will be close to. Any change in monetary policy will consequently lead to significant changes in the equilibrium level of output.