Two economies A and B are in recession. Economy A has MPC = 0.80 and economy...
Two economies A and B are in recession. Economy A has MPC = 0.80 and economy B has MPC = 0.60. Governments of both countries want to implement a fiscal policy of increased government spending for their economies to recover. In which economy increased government spending has the greatest impact on the GDP?
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Homework Answers
The economy with a higher MPC means that if the government spend $1 in the economy out of that 0.80 cents are spend in the market and only 0.20 are saved. MPC of 0.60 means a larger sum is saved and less amount spend. SO, the economy with a higher MPC will come out of recession quickly as compared to a lower MPC nation because here, government expenditure will lead to a higher consumption and larger change in the output.
SO, they will come recover easily as compared to a lower MPC economy.
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