The sustainable growth rate of real GDP is most likely to be increased by: an increase in the propensity to consume by households. Why is it the saving and not consumption that incrases the growth rate of GDP?
when household consume aggregate demand increases and that results in increase in GDP. Not sure about what you are asking though
Propensity to consume IS consumption…
sorry, the correct answer is the Propensity to Save and Invest. I am wondering why gdp ncreases when MPS (marginal propensity to save) increases as opposed to MPC (consume). Wouldn’t consumption by individuals increase GDP?
Yes, both Savings and Consumption are components of AD and hence influence GDP. BUT… when comparing among these two components: When Savings increase, they are invested back in the economy to increase production capacity. And when Consumption increases without the capacity in the economy to produce those goods, it only results in increase in Prices. Increased Prices would increase Nominal GDP but not Real GDP.