Suppose that Japan is a nation of savers with a marginal propensity to consume of 0.6 and that the United States is a nation of spenders with a marginal propensity to consume of 0.9. Which of the following statements is correct?
A) A small increase in spending will have a more powerful effect in starting a recovery in the United States than in Japan.
B) The Japanese economy is not in equilibrium.
C) The Japanese economy is more susceptible to a recession caused by a decrease in spending.
D) The U.S. economy tends to overheat from too much spending.

Question

Quizplus · Accepted Answer

A higher marginal propensity to consume (MPC) means that any increase in spending will have a larger multiplier effect. Therefore, with an MPC of 0.9, the U.S. will experience a more powerful effect from a small increase in spending compared to Japan's MPC of 0.6.

Suppose That Japan Is a Nation of Savers with a Marginal