Question

According to the Bureau of Economic​ Analysis, during the recession of 2007minus​2009, household saving as a fraction of disposable personal income increased from a low of just over 1 percent in the first quarter of 2008 to 5 percent in the second quarter of 2009. All else​ equal, a higher saving rate would A. decrease MPC​, increase MPS​, and decrease the multiplier so that changes in planned investment will have a smaller impact on equilibrium output. B. increase MPC​, decrease MPS​, and decrease the multiplier so that changes in planned investment will have a smaller impact on equilibrium output. C. increase MPC​, decrease MPS​, and increase the multiplier so that changes in planned investment will have a larger impact on equilibrium output. D. decrease MPC​, increase MPS​, and increase the multiplier so that changes in planned investment will have a larger impact on equilibrium output.

Answer 1

Answer:

A) decrease MPC​, increase MPS​, and decrease the multiplier so that changes in planned investment will have a smaller impact on equilibrium output.

Explanation:

When you receive money, e.g. get paid by your employer, the first thing you do is pay for your basic necessities which are classified as autonomous spending. Then hopefully you will have some money left which is classified as disposable income. You can do two things with your disposable income, either spend it or save it.

The proportion that you spend is called the marginal propensity to consume (MPC) and the remaining part that you save is called the marginal propensity to save (MPS). If the MPS was 1% in 2007 and increased to 5% in 2009, then the MPC was 0.99 in 2007 and 0.95 in 2009.

The formula to calculate the economic multiplier is 1 / MPS:

• the economic multiplier in 2007 = 1 / 1% = 100
• the economic multiplier in 2009 = 1 / 5% = 20