Final answer:
A decrease in government transfers will typically result in a decrease in equilibrium income and consumption due to reduced disposable income. It's not guaranteed to increase savings, as both consumption and savings could decrease with a fall in income.
Step-by-step explanation:
The question asks what will happen if the marginal propensity to consume (MPC) is 0.8 and government transfers decrease by 50 million. Given the MPC, we know that the marginal propensity to save (MPS) is 0.2 since MPC + MPS = 1. A decrease in government transfers would lead to a reduction in private disposable income, which in turn decreases consumption and savings.
Here are the effects of the decrease in government transfers by 50 million:
- a) There will be a decrease in equilibrium income, as the initial decrease in transfer payments will have a multiplied effect on the total income due to the spending cycle.
- b) There will be an increase in savings only if the income level remains the same, which is unlikely in this scenario since a decrease in government transfers usually causes total income to fall. This representation assumes the context of unchanged income levels, which might not be precise in reality.
- c) There will be a decrease in consumption because people have less disposable income to spend.
- d) There will be an increase in investment is not directly correlated with the change in government transfers as explained in this scenario.