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In: Economics

State whether the following statement is True, False, or Uncertain. Be sure to explain your answer....

State whether the following statement is True, False, or Uncertain. Be sure to explain your answer.

The marginal propensity to consume from a permanent parallel upward shift in the production function is smaller than the marginal propensity to consume from a temporary parallel upward shift in the production function.

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Expert Solution

The marginal propensity to consume from a permanent parallel upward shift in the production function is smaller than the marginal propensity to consume from a temporary parallel upward shift in the production function.
- FALSE
Reason : The marginal propensity to consume will be close to one when there is a permanent parallel upward shift in the production function because people will be able to consume more at the given level of income. The permanent increase in production function will increase output in the economy which in turn will increase the long term average of incomes and thus, the marginal propensity to consume will be large. Whereas, in case of a temporary shift in the production function, the marginal propensity to consume will increase by a smaller proportion because there is an increase in current income level only and if individuals get used to the higher consumption, they would want to continue their consumption in the future as well and in order to keep up with the increase in consumption, they would have to increase their savings as well which won't be possible if the income change is temporary and hence, the MPC will be small. Thereby, we can conclude by saying that the marginal propensity to consume from a permanent parallel upward shift in the production function will be greater than the marginal propensity to consume from a temporary shift in the production function.

Rahul Sunny answered 8 months ago
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