Less developed countries are often characterized by imperfect capital markets.Assuming that the LCH applies to these countries and that a large proportion of the population is below fifty the
A)MPC should be relatively high.
B)MPC should be relatively low.
C)frequency of liquidity constraints is low.
D)sensitivity of consumption to loans is low.

Question

Quizplus · Accepted Answer

The Life-Cycle Hypothesis (LCH) suggests that individuals plan their consumption and savings behaviour over their lifetime. In less developed countries with imperfect capital markets, a large proportion of the population may not have sufficient access to credit or savings mechanisms. This, combined with a younger population, implies that individuals are less able to save for the future or borrow against future income, leading to a relatively high Marginal Propensity to Consume (MPC) as they are more likely to consume a larger portion of their current income.

Less Developed Countries Are Often Characterized by Imperfect Capital Markets