Question

Imagine that an economic recession erodes consumer confidence. As a result, the marginal propensity to consume drops from .8 to .6. If the government tries to stimulate the economy by increasing government spending, will the spending be more or less effective at MPC?

Answer 1

Answer:

Increased government spending will be less effective for raising the Marginal Propensity to Consume.

Explanation:

The Marginal Propensity to Consume depends on disposable income, and disposable income is the money that individuals have after paying tax.

If the government increases spending, it will also increase taxes to finance spending, and if taxes are higher, people will have less disposable income, and even if their marginal propensity to consume increases, because they now have less money, the will spend less in total.