Explain whether each of the following would cause the value of the multiplier to be larger or smaller. a. An increase in real GDP increases imports. b. An increase in real GDP increases interest rates. c. An increase in real GDP increases the marginal propensity to consume. d. An increase in real GDP causes the average tax rate paid by households to decrease. e. An increase in real GDP increases the price level.

Understanding the marginal propensity to consume (MPC) is vital when dissecting the components of the economic multiplier. MPC is the share of additional income that a household is likely to spend on goods and services, as opposed to saving it. A simple representation of MPC is given by the formula:
\[\begin{equation} MPC = \frac{\text{Change in Consumption}}{\text{Change in Income}} \end{equation}\]
A higher MPC implies that increases in income lead to larger increases in consumption, which in turn fuels more economic activity. The economic multiplier is directly affected by the MPC because when people spend more, their expenditure becomes someone else's income, perpetuating a cycle of spending and income generation that propels the economy forward.

Real Gross Domestic Product (GDP) is a measure of the value of all goods and services produced in an economy over a specified period, adjusted for inflation. By taking inflation into account, real GDP provides a more accurate picture of an economy's size and growth than nominal GDP. When analyzing economic health, real GDP serves as an essential yardstick since it reflects the actual increase in goods and services. As real GDP rises, so potentially does the capacity for spending and investment, influencing the various factors that can amplify or diminish the economic multiplier.

Imports play a crucial role in the multiplier effect. When a country's real GDP increases, it may lead to higher import consumption, funneling money out of the domestic economy to other countries. This outflow acts as a leakage that can shrink the potential domestic economic impact of additional spending and reduce the multiplier. However, the overall influence of imports on the multiplier effect also depends on the trade balance and the structure of domestic versus foreign consumption. For instance, if domestic production increases and replaces some imports, this might counteract the potential negative effect on the multiplier.

Interest rates significantly influence consumer and business spending. Typically, higher interest rates discourage borrowing by making loans more expensive. This can lead to a decrease in consumption and investment spending since consumers and businesses may choose to save rather than spend. Therefore, when real GDP increases and interest rates rise, this can suppress the economic multiplier because less spending translates to fewer opportunities for income generation across the economy.

Fiscal policy, involving government spending and taxation, is a powerful tool affecting the economic multiplier. When fiscal policy is expansionary, with higher spending and lower taxes, it can enhance the multiplier effect by increasing disposable income and stimulating consumption. Conversely, contractionary fiscal policy, through cutting government spending or increasing taxes, may reduce consumption and thereby diminish the multiplier. The interaction between fiscal policy and the economic multiplier is complex, as effects can vary based on the existing economic climate, government budget constraints, and consumer confidence.