Final answer:
The relationship between the Marginal Propensity to Consume (MPC) and full employment is direct, meaning that consumption tends to increase as national income increases when the economy is at full employment. A higher MPC results in a steeper consumption function that positively correlates with national income.
Step-by-step explanation:
The relationship between the Marginal Propensity to Consume (MPC) and full employment, which can be denoted by the potential or natural level of output, typically represented by Y, is generally considered direct. The MPC represents the proportion of additional income that a household intends to spend on consumption rather than savings. When the economy is at full employment (Y), the consumption expenditures tend to increase as the national income rises because more income means that consumers will have more money to spend, assuming the MPC is positive. The consumption function is upward-sloping because it shows that as national income increases, consumption also increases. A higher MPC means a steeper consumption function directly correlating with national income.
For example, if individuals receive an increase in income, and the MPC is 0.8, then for every additional dollar earned, 80 cents will go towards consumption expenditure. Since at full employment the economy is effectively utilizing all its resources, increases in income would generally boost consumption provided the MPC remains positive. Thus, assuming other factors constant, such as the level of taxes and government spending, the relationship between MPC and full employment is direct.