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1. What is Marginal Propensity to Consume (MPC)?
MPC is the fraction of additional income that a household spends on consumption rather than saving.
Example: If someone earns an extra ₹1000 and spends ₹800, then MPC = 0.8.
2. Link between MPC and Aggregate Demand
A higher MPC means people spend more of their income.
Increased spending → boosts aggregate demand (AD) for goods and services.
Higher AD stimulates production, investment, and employment → pushing economic growth upward.
3. The Multiplier Effect
The size of MPC directly determines the multiplier in Keynesian economics:
If MPC is high (close to 1), the multiplier is large, meaning any increase in investment or government spending creates a bigger expansion in national income.
If MPC is low, much of the income is saved, so the multiplier effect is weaker.
4. Long-Run Impacts
High MPC → faster short-run growth due to strong demand.
But if it’s too high, savings may be too low, reducing funds for long-term investments.
Moderate MPC → balances consumption and savings, ensuring both short-term demand and long-term capital formation.
Low MPC → weaker demand, slower growth, but potentially higher savings for future investment.
5. Policy Relevance
Governments often encourage higher MPC during recessions (through tax cuts, subsidies, direct transfers).
In booming times, they may promote saving and investment to sustain long-term growth.
In summary:
A higher MPC stimulates economic growth by increasing consumption and magnifying the multiplier effect. However, if too high, it can reduce savings needed for long-term investment, so an economy grows best with a balance between consumption and saving
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