Question

A specific reduction in government spending will dampen demand-pull inflation by a greater amount the: 
A. Smaller is the economy's MPC
B. Flatter is the economy's aggregate supply curve
C. Smaller is the economy's MPS
D. Less the economy's built-in stability

Answer 1

Answer:

The correct answer is option C.

Explanation:

A reduction in spending is going to reduce the income of the consumers in the economy. The consumers do not spend all their income but save it partially. The saving is used to create funds which are invested again and lead to increase in output. The rate of consumption depends on the marginal propensity to consume and marginal propensity to save. The marginal propensity to save is 1-MPC. Smaller MPS will cause saving to be less, consequently investment will also be lower.

So, a reduction in the government spending will be more effective in curbing demand-pull inflation if the marginal propensity to consume is higher and marginal propensity to save is smaller.