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Question
Statistics
Posted 8 months ago

If the marginal propensity to consume (MPC) decreases from 0.8 to 0.6 , how will the marginal propensity to save (MPS) and the spending multiplier change?

Choose 1 answer:
(A) The MPS increases; spending multiplier decreases
(B) The MPS decreases; spending multiplier decreases
(c) The MPS increases; no change in the spending multiplier
(D) The MPS increases; the spending multiplier increases
(E) No change to the MPS, the spending multiplier increases
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Answer from Sia
Posted 8 months ago
Solution by Steps
step 1
To understand how the marginal propensity to save (MPS) changes when the marginal propensity to consume (MPC) decreases, we use the relationship: MPS=1−MPC MPS = 1 - MPC
step 2
Calculate the initial MPS using the initial MPC of 0.8: MPSinitial=1−0.8=0.2 MPS_{initial} = 1 - 0.8 = 0.2
step 3
Calculate the new MPS after the MPC decreases to 0.6: MPSnew=1−0.6=0.4 MPS_{new} = 1 - 0.6 = 0.4
step 4
To understand how the spending multiplier changes, we use the formula for the spending multiplier: Multiplier=11−MPC Multiplier = \frac{1}{1 - MPC}
step 5
Calculate the initial spending multiplier using the initial MPC of 0.8: Multiplierinitial=11−0.8=5 Multiplier_{initial} = \frac{1}{1 - 0.8} = 5
step 6
Calculate the new spending multiplier after the MPC decreases to 0.6: Multipliernew=11−0.6=2.5 Multiplier_{new} = \frac{1}{1 - 0.6} = 2.5
Answer
The MPS increases from 0.2 to 0.4, and the spending multiplier decreases from 5 to 2.5.
A
Key Concept
Relationship between MPC, MPS, and the spending multiplier
Explanation
When MPC decreases, MPS increases because they sum to 1. The spending multiplier decreases because it is inversely related to the MPS.

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