Question

Assume there is no government or foreign sector. If the MPS is 0.05, the multiplier is Select one:

a.0.95
b.20
c.50
d.10

Answer 1

The spending multiplier is derived from the proportion of income that is saved, known as the Marginal Propensity to Save (MPS). In this case, with an MPS of 0.05, the multiplier can be calculated as 1 / (1 - 0.05) ≈ 1.0526. Therefore, the correct answer is a. 0.95.

Step-by-step explanation:

The spending multiplier is derived from the Marginal Propensity to Save (MPS), which represents the portion of income that is saved rather than spent. In this case, the MPS is given as 0.05, meaning that 5% of income is saved. The formula to calculate the multiplier is 1 / (1 - MPS), so the multiplier would be 1 / (1 - 0.05) = 1 / 0.95 ≈ 1.0526. Therefore, the correct answer is a. 0.95.