Imagine a world where there are only two countries. In country A, the people spend 80% of their marginal income. In country B, t

Question

2 years ago

5

he people spend 60% of their marginal income. In which country would fiscal policy be more effective and why

1 answer:

Pavlova-9 [17] · Answer 1 · 2022-09-05T04:13:41+03:00

Based on the percentage spent out of their marginal income, the country where fiscal policy would be more effective is Country A

The country where fiscal policy would be more effective is the one that has a higher multiplier.

Multiplier is calculated as:

= 1 / ( 1 - Marginal propensity to consume)

Marginal propensity to consume is the percentage spent out of marginal income.

Country A multiplier:

= 1 / ( 1 - 80%)

= 5

Country B multiplier:

= 1 / ( 1 - 60%)

= 2.5

In conclusion, fiscal policies would be more effective in Country A.