marginal propensity to consume
-noun-; in keynesian economics, the rate at which aggregate consumption rises in response to a rise in national income.
for example, suppose the marginal propensity to consume (mpc) is 0.95. if the national income is 100 billion dollars, and it rises 10%, then consumption will rise by 9.5 billion, and saving will rise by 0.5 billion.
if this theory is correct, then an expanding economy will suffer insufficient demand for its own output, and a recession will be inevitable.
this is why national governments respond to recessions with deficit spending: they are trying to counteract the mpc’s effect on aggregate demand, and bring it in line with potential output.
not only is the marginal propensity to consume weaker in a wealthy community, but, owing to its acc-mulation of capital being already larger, the opportunities for further investment are less attractive…
j.m. keynes, -the general theory of employment, interest, and money- (1936), ch.3
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