Maximum multiplier madness (2013 HSC exam)

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Here’s a past question from the 2013 NSW Economics HSC exam. It’s multiplier focused, for maximum multiplier madness.

Source: NESA (click through for full exam)

Source: NESA (click through for full exam)

This is a bit trickier than some other multiplier questions because it’s a different way of examining the same content. There are no numbers, no need to hunt for changes to national income or the multiplier itself. 

Still, I think the best way to play this is to actually use numbers. 

For instance, the question tells us the MPC has declined. So, let’s create two scenarios:

  • Scenario one: MPC is 0.6

  • Scenario two: MPC is 0.3.

If MPC is 0.6, then MPS is 0.4. So the multiplier (k=1/MPS) would be 2.5 in scenario one.

Cool. Then, if MPC is 0.3, then MPS is 0.7. So the multiplier (1/MPS) would be 1.43 (2dp).

So, as the MPC falls, the size of the multiplier shrinks. This makes sense because the less spending that takes place (MPC), the less money that gets multiplied around the economy.

And if the multiplier falls, then the initial injection of aggregate demand will be multiplied fewer times and result in a fall in equilibrium income.

Hence, our answer is B.

You can also see the worked solution below.

Solution for the question starts at 2:47.