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 statement 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

The higher marginal propensity to consume in the United States means that a small increase in spending will lead to a larger increase in overall demand and stimulate the economy more quickly. Japan, with a lower marginal propensity to consume, would require a larger increase in spending to achieve the same level of stimulation.

Suppose That Japan Is a Nation of Savers with a Marginal