Question

If the marginal propensity to save is 0.2 in an economy, a $20 billion rise in investment spending will increase:

Answer 1

Answer:

D. Consumption by $80 billion.

Explanation:

Marginal propensity to Save = 1 / MPS

= 1 / 0.2

= 5

= $20 billion × 5

= $100 billion

= $100 - $20

= $80 billion

Therefore, a $20 billion rise in investment spending will increase consumption by $80 billion.