. In the simple fixed-price Keynesian model with no taxes and fixed imports, why does the...

. In the simple fixed-price Keynesian model with no taxes and fixed imports, why does the MPC have to be less than one? What happens if the MPC is equal to one? What if the MPC is greater than one?

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Expert Solution

MPC measures the marginal propensity to consume or the ability of the consumer to increase his consumption whenever his income increases. In most cases it is expected that if income is increased by a certain proportion then one portion of it will be saved and another portion of it will be consumed. Due to this expectation based on a large scale the marginal propensity to consume has a value of less than 1 so that only a portion of the increased income is consumed. The value of MPC can be equal to one incase where nothing is saved and all of the increased income is consumed.

The value of marginal propensity to consume cannot be greater than one because one can not increase his consumption by more than the increase he has perceived in his income. If a person experiences an income increase of $10,000 he can only consume the entire $10,000 but not more than that. Therefore the value of marginal propensity to consume always lie between 0 and 1 and it can be also be either zero or either one but never greater than 1.

Rahul Sunny answered 2 years ago

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