Consider an economic model with no income taxes and no international trade.Suppose the marginal propensity to consume in Canada is 3/5, and the marginal propensity to save in India is 1/10.Which of the following characterizes how the Indian and Canadian economies would be affected?
A) Increases in government purchases would increase real GDP demanded more per dollar in India than in Canada.
B) Decreases in government purchases would increase real GDP demanded more per dollar in India than in Canada.
C) Increases in autonomous saving would increase real GDP demanded more per dollar in India than in Canada.
D) Real GDP demanded would be higher in India than in Canada.

Question

Consider an economic model with no income taxes and no international trade.Suppose the marginal propensity to consume in Canada is 3/5, and the marginal propensity to save in India is 1/10.Which of the following characterizes how the Indian and Canadian economies would be affected?  
A) Increases in government purchases would increase real GDP demanded more per dollar in India than in Canada. 
B) Decreases in government purchases would increase real GDP demanded more per dollar in India than in Canada. 
C) Increases in autonomous saving would increase real GDP demanded more per dollar in India than in Canada. 
D) Real GDP demanded would be higher in India than in Canada.

Quizplus · Accepted Answer

The multiplier effect in an economy is inversely related to the marginal propensity to save (MPS). Since India has a higher MPS (1/10) compared to Canada's implied MPS (2/5, given the marginal propensity to consume is 3/5), the multiplier effect is smaller in India. Therefore, increases in government purchases would have a larger impact on real GDP demanded per dollar in Canada, not India, making A incorrect based on the premise of the question. However, given the choices provided and the logic of the question, it seems there might be a misunderstanding in the explanation. The correct interpretation should be that with a lower MPS (meaning a higher marginal propensity to consume), the multiplier effect is larger, so increases in government purchases would indeed increase real GDP demanded more per dollar in Canada than in India, contradicting the direct answer provided. This highlights a mistake in the initial explanation. The multiplier effect is calculated as 1/(1-MPC) or 1/MPS. Canada's lower MPS (implied by a higher MPC) suggests a larger multiplier effect than India's, meaning any fiscal stimulus would have a more pronounced effect on Canada's GDP. However, the choices seem to misinterpret the economic principles, suggesting a need for clarification in the question's premise or the answer choices.

Consider an Economic Model with No Income Taxes and No