Answer to Question #49247 in Macroeconomics for sanghamita Ghosh
Even though the MPC is so high and MPS being so low in US. Why the economics bailout packages of the government have little expansionary effect on US economy. Discuss the above statement with reference to the multiplier operation.
In a recession, consumers may reduce spending leading to an increase in private sector saving. Therefore a rise in taxes may not reduce spending as much as usual. The increased government spending may create a multiplier effect. If government spending causes the unemployed to gain jobs then they will have more income to spend leading to a further increase in aggregate demand. (e.g. construction workers employed by government increase spending in pubs and transport, causing other sectors of the economy to benefit from the government spending). In these situations of spare capacity in the economy, the government spending may cause a bigger final increase in GDP than the initial injection.