Question

Statistics

Posted 3 months ago

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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 3 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: $MPS = 1 - MPC$

step 2

Calculate the initial MPS using the initial MPC of 0.8: $MPS_{initial} = 1 - 0.8 = 0.2$

step 3

Calculate the new MPS after the MPC decreases to 0.6: $MPS_{new} = 1 - 0.6 = 0.4$

step 4

To understand how the spending multiplier changes, we use the formula for the spending multiplier: $Multiplier = \frac{1}{1 - MPC}$

step 5

Calculate the initial spending multiplier using the initial MPC of 0.8: $Multiplier_{initial} = \frac{1}{1 - 0.8} = 5$

step 6

Calculate the new spending multiplier after the MPC decreases to 0.6: $Multiplier_{new} = \frac{1}{1 - 0.6} = 2.5$

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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