Question

As the marginal propensity to consume (MPC) increases, the multiplier increases. decreases. remains the same. As the marginal propensity to save (MPS) increases, the multiplier decreases. remains the same. increases. If the marginal propensity to consume is 0.40 , what is the multiplier, assuming there are no taxes or imports

Answer 1

Answer: 1. Increases

2. Decreases

3. 1.67

Explanation:

The formula for the Investment Multiplier is,

= 1/ ( 1 - MPC)

From this formula, inferences can therefore be made.

1. As the marginal propensity to consume (MPC) increases, the Multiplier INCREASES.

As the MPC increases, it will reduce the denominator therefore increasing the Multiplier.

2. As the marginal propensity to save (MPS) increases, the multiplier DECREASES.

The Marginal Propensity to Save is ( 1 - MPC) because what isn't consumed is saved.

The MPS is therefore the denominator of the Multiplier equation.

That means then that as it rises, the Multiplier Decreases.

3. The Formula for the Investment Multiplier is, = 1 / ( 1 - MPC)

= 1 / ( 1 - 0.40)

= 1.67