ECONOMICS
AGGREGATE DEMAND
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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If the marginal propensity to consume (MPC) decreases from 0.8 to 0.6, how will the marginal propensity to save (MPS) and the spending multiplier change?
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The MPS increases; spending multiplier decreases
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The MPS decreases; spending multiplier decreases
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The MPS increases; no change in the spending multiplier
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The MPS increases; the spending multiplier increases
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No change to the MPS, the spending multiplier increases
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Explanation:
Detailed explanation-1: -Multiplier(k) = 1/ (1-MPC) = 1/(1-0.8) = 1/0.2= 5.
Detailed explanation-2: -HINT: Since this change is a result of something other than a change in the price level, it represents an autonomous change. Since the marginal propensity to consume is 0.8, the multiplier is 5 = 1/(1-. 8) = 1/0.2.
Detailed explanation-3: -If MPC is 0.6 the investment multiplier will be 2.5.
Detailed explanation-4: -So, when we receive extra income on our check, the portion we spend is referred to as the marginal propensity to consume. The amount of the marginal propensity to consume, therefore, contributes to the multiplier effect because extra income leads to extra demands and/or spending and creates more income.
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