Select Any One Of the Following Options: Government expenditure is more effective in economies when _______- . Fill in the blanks.Doesn?t depend on MPC and MPS valuesMPC value is lowMPS value is lowMPS value is high
Question
Select Any One Of the Following Options: Government expenditure is more effective in economies when _______- . Fill in the blanks.Doesn?t depend on MPC and MPS valuesMPC value is lowMPS value is lowMPS value is high
Solution
Government expenditure is more effective in economies when the MPS (Marginal Propensity to Save) value is low.
Here's why:
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MPS is the proportion of an additional income that an individual consumes rather than saving. If MPS is low, it means that people are saving less and spending more.
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When government expenditure is injected into the economy, it is spent by the recipients. If people are more inclined to spend (low MPS), this money circulates in the economy, creating demand and stimulating economic activity.
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This is known as the multiplier effect - an initial change in aggregate demand can cause a further change in aggregate output for the economy than the initial change.
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Therefore, when MPS is low, government expenditure is more effective as it leads to a higher multiplier effect, stimulating economic growth.
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