Question

If the marginal propensity to save (MPS) is 0.35, Instructions: Round your responses to two decimal places. the marginal propensity to consume (MPC) is? the multiplier is?

Answer 1

The marginal propensity to consume (MPC) is 0.65 when the marginal propensity to save (MPS) is 0.35. The multiplier, which determines the impact of spending on the overall economy, is approximately 2.86 after rounding to two decimal places.

Step-by-step explanation:

If the marginal propensity to save (MPS) is 0.35, then the marginal propensity to consume (MPC) can be calculated as follows:

MPC = 1 - MPS

MPC = 1 - 0.35

MPC = 0.65

Therefore, the marginal propensity to consume is 0.65.

Regarding the multiplier, it is the reciprocal of 1 minus the MPC, which can be expressed as:

Multiplier = 1 / (1 - MPC)

Multiplier = 1 / (1 - 0.65)

Multiplier = 1 / 0.35

Multiplier = 2.86

So, the multiplier is approximately 2.86 when rounded to two decimal places. The formulas used here are key in macroeconomic analysis to understand how changes in income levels affect consumption and savings, and the overall economic activity through the multiplier effect.