Question

If the marginal propensity to save is 0.25, a $15 billion increase in government spending will lead to an increase in national income by a maximum of

Answer 1

Based on the marginal propensity to save, MPS , the national income will increase by a maximum of $20 billion.

What is marginal propensity to save?

Marginal propensity to save (MPS) is a measure of how savings will change, given a change in income.

Marginal propensity to save is related to marginal propensity to consume, MPC by the formula:

• MPS + MPC = 1

Grom the given value of MPS,

MPC = 1 - 0.25

Therefore, MPC = 0.75

Also, the formula for calculating marginal propensity to consume is given as:

• Marginal propensity, MPC = ΔC/ΔY

Where:

• ΔC is a change in consumption
• ΔY is a change in income

ΔY = ΔC/MPC

ΔY = $15 billion/0.75

ΔY = $20 billion

Therefore, the national income will increase by a maximum of $20 billion.

Learn more about marginal propensity to save at: brainly.com/question/18521055