Government expenditure is more effective in economies when _______- . Fill in the blanks.MPS value is lowDoesn?t depend on MPC and MPS valuesMPC value is lowMPS value is high
Question
Government expenditure is more effective in economies when _______- . Fill in the blanks.MPS value is lowDoesn?t depend on MPC and MPS valuesMPC value is lowMPS value is high
Solution
Government expenditure is more effective in economies when MPC value is high.
Here's why:
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MPC stands for Marginal Propensity to Consume. It is the increase in consumer spending due to an increase in income. A higher MPC means consumers are likely to spend more when their income increases.
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When government expenditure increases (for example, through public projects), it injects more money into the economy, leading to an increase in income for businesses and individuals.
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If MPC is high, this increase in income will lead to a significant increase in consumer spending. This further stimulates the economy as businesses experience increased demand, potentially leading to more hiring, higher wages, and further increases in consumer spending.
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Therefore, government expenditure is more effective in stimulating the economy when the MPC value is high.
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