The Impact of Propensity to Save on Fiscal Policy Effectiveness in Boosting Economic Growth and Employment Levels.

What is the effect of an increase in the propensity to save on the effectiveness of fiscal policy effected by increasing government spending?

*An increase in government spending works by increasing aggregate demand regardless of the shape of the AS curve*Government spending increases Y on its own, but also increases it via the consumption channel (multiplier effect)*MPS increases -> multiplier decreases which lessens the effect of fiscal policy

When the propensity to save increases, it means that households and businesses are saving more and spending less, which reduces their consumption expenditure. This can have a dampening effect on the effectiveness of fiscal policy that involves increasing government spending, as the intended increase in aggregate demand may be offset by the decrease in private consumption spending.

In other words, if the government increases its spending while the private sector is saving more, it may not have the desired impact of increasing economic activity and growth as private spending remains lower. This could lead to lower-than-expected economic growth, lower employment levels, and possibly lower inflation rates.

However, the effectiveness of fiscal policy will depend on the magnitude of the increase in private saving compared to the increase in government spending. If the increase in government spending is large enough to offset the decrease in private consumption, then the fiscal policy can still be effective.

Additionally, the effectiveness of fiscal policy could also depend on the type of goods and services being purchased by the government. If the government’s spending is directed towards goods and services that stimulate private sector demand, such as infrastructure investment, then the fiscal policy could be more effective in boosting economic growth and employment levels.

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