Allocation of Additional Income between Consumption and Saving

Multiplier Value Greater Than One

An economy experiences a sudden, one-time increase in aggregate income. According to the core behavioral assumptions that form the basis for how initial spending changes get magnified throughout the economy, which of the following outcomes is the most plausible description of how households, in aggregate, will react?

Evaluating Economic Assumptions

If an economic model is built on the assumption that for every additional dollar of income households receive, their consumption spending increases by $1.05, this assumption is consistent with the standard behavioral framework used to explain how initial changes in spending can have a larger final impact on the economy.

The Foundation of Economic Magnification

Analyzing an Economic Anomaly

Evaluating a Core Behavioral Assumption in Economics

An economic model describes how households respond to changes in their income. Match each described household behavior with the corresponding value for the proportion of additional income they spend.

In an economic model where one person's spending becomes another person's income, an initial injection of spending will lead to a series of subsequent spending rounds. For the total economic impact of this initial injection to be larger than the initial amount but still a finite number, the fraction of any additional income that people spend must be a value greater than zero and strictly less than ____.

In a simplified economic model, it is assumed that when households receive additional income, they spend a portion of it, which in turn becomes income for others, leading to subsequent rounds of spending. If a model were to assume that households, in aggregate, consistently spend more than 100% of any additional income they receive, what would be the logical consequence for the economy following an initial injection of new spending?

Evaluating an Economic Forecast