Question

Assume that consumers in a nation reduce their marginal propensity to save from 0.25 to 0.2 though their personal incomes initially do not change. How will this change in MPS affect the economy

Answer 1

Answer:

Since the multiplier is now higher than before, this change in MPS will therefore make the real gross domestic product (GDP) to increase.

Explanation:

Old marginal propensity to save = 0.25

Old marginal propensity to consume = 1 - 0.25 = 0.75

Old multiplier = 1 / Old marginal propensity to save = 1 / 0.25 = 4

New marginal propensity to save = 0.20

New marginal propensity to consume = 1 - 0.20 = 0.80

New multiplier = 1 / New marginal propensity to save = 1 / 0.20 = 5

Change in multiplier = New multiplier - Old multiplier = 5 - 4 = 1

Therefore, the decrease in marginal propensity to save (MPS) will increase marginal propensity to consume (MPC) form 0.75 to 0.80 and the multiplier from 4 to 5.

Since the multiplier is now higher than before, this change in MPS will therefore make the real gross domestic product (GDP) to increase.