ECONOMICS
AGGREGATE DEMAND
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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an MPS of 0.8 and a multiplier of 5
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an MPS of 0.4 and a multiplier of 2.5
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an MPS of 0.6 and a multiplier of 2
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an MPS of 0.4 and a multiplier of 3.5
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Detailed explanation-1: -MPS is most often used in Keynesian economic theory. It is calculated simply by dividing the change in savings observed given a change in income: MPS = S/Y.
Detailed explanation-2: -One small change in the government’s activities will create a big change in the overall economy. The spending multiplier formula is calculated by dividing 1 by the MPS. It can also be calculated by dividing 1 by 1 minus MPC.
Detailed explanation-3: -How are MPC and MPS calculated? The marginal propensity to consume (MPC) is found by dividing the change in spending on consumption by the change in someone’s income. The marginal propensity to save (MPS) is similarly found by dividing the change in saving by the change in income.
Detailed explanation-4: -The Spending Multiplier can be calculated from the MPC or the MPS. Multiplier = 1/1-MPC or 1/MPS