Liquidity constraint to liquidity constraint

Reference no: EM13692662

Suppose an economy goes from no liquidity constraint to liquidity constraint. What will happen to fiscal policy power to change the level of income?

I know that the MPC in a liquidity constrained economy is higher which leads to a higher multiplier and more power for fiscal policy. But my confusion occurs because if people are liquidity constrained, wouldn't they consume less and save more since they cannot borrow?

Reference no: EM13692662

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