HSC Economics Practice Exam 2025 – Comprehensive Test Preparation

When the marginal propensity to consume (MPC) is high, it indicates that consumers tend to spend a large portion of any additional income they receive rather than saving it. This behavior directly influences Aggregate Demand (AD), which consists of the total demand for goods and services in an economy at a given overall price level and in a given time period.

When the MPC is high, an increase in income—such as from wages, government benefits, or other income sources—leads to a significant increase in consumption expenditures. Since consumption is a major component of AD, a higher MPC effectively amplifies the impact of changes in income on aggregate consumption. Consequently, as consumers spend more, overall demand in the economy rises, which in turn encourages businesses to increase production, hire more workers, and invest in capital.

This cycle can lead to a multiplicative effect on AD, where increases in spending can stimulate further economic activity. Therefore, when the MPC is high, AD typically increases, reflecting a strong relationship between consumer spending and overall demand in the economy.