If the government increases its spending without raising taxes, which of the following describes the likely effect on the economy assuming the marginal propensity to consume (MPC) is high?
1
The budget multiplier will be negative, reducing overall economic output
2
A high MPC leads to a larger budget multiplier, resulting in a significant increase in aggregate demand and economic output
3
The budget multiplier remains unchanged, regardless of MPC levels, as it depends only on the amount of spending
4
Increased government spending will decrease private sector investment, leading to a decrease in output