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I was just reading my economics notes when I stumbled upon this paragraph:

Singapore has a very open economy and imports most of its inputs and necessities, which means that MPM is likely to be very high. Also, Singapore has a high savings rate due to its compulsory savings scheme, leading to a high MPS. The high marginal propensity to withdraw means that the multiplier k is small. Hence, any government injection is not likely to lead to a much greater change in national income. This is why government injection is not effective in achieving actual economic growth in Singapore.

I think the analysis given to support why MPC would be small in Singapore and hence, why the multiplier would be small is valid. However, I find the last statement particularly dubious. Even if theoretically, the MPC = 0, k would still be 1, i.e. the autonomous injection by the government will be fully equal to the increase in the real national income. Wouldn't that still mean that an autonomous injection by the government would still be effective in growing the economy, i.e. increase the national output? Because whatever amount forked out by the government would go to increasing the real national income by the same amount and hence, a significant increase in AD would still take place.

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I agree with you. One way of justifying such a statement would be related to how high marginal propensity to withdraw is.

Indeed, these behaviors may constrain commercial banks to virtually deal with a 100% money, as if they were managing a permanent risk of bank run.

My conclusion needs to be verified empirically.

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  • $\begingroup$ So you don't agree that the statement in bold is correct? In other words, you feel that even if there is no/little multiplier effect, economic growth can still be achieved through autonomous injections? $\endgroup$ – Tan Yong Boon Jan 4 at 11:13
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    $\begingroup$ @Tan. No, I agree with the statement, but I clarify why it may be so. Actually, I think that the causality between the withdraw-propensity of people in Singapore and the bold conclusion is not emphasized enough. $\endgroup$ – keepAlive Jan 4 at 11:23
  • $\begingroup$ "These behaviours" in the 2nd para refers to autonomous injections by the govt? $\endgroup$ – Tan Yong Boon Jan 4 at 11:26
  • $\begingroup$ @Tan no. It refers to withdraws. $\endgroup$ – keepAlive Jan 4 at 12:28
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    $\begingroup$ I think we are looking at different definitions of withdraw... In macroeconomics, MPW = MPT + MPS + MPM. Withdrawing refers to the movement of income out of the inner flow of the economy and into foreign sectors, government and financial markets. On the other hand, you are looking at it as taking money out of the bank. $\endgroup$ – Tan Yong Boon Jan 4 at 12:41

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