The following table illustrates the multiplier process in a private closed economy: Refer to the above table.The marginal propensity to save is:
A).5.
B).25.
C).2.
D).1.

Question

The following table illustrates the multiplier process in a private closed economy:  Refer to the above table.The marginal propensity to save is:
A).5. 
B).25. 
C).2. 
D).1.

Quizplus · Accepted Answer

The multiplier process shows that each level of income is equal to the sum of the previous level of income and the marginal propensity to consume (MPC) times the previous level of income. In this case, we can see that at each level, the income increases by 200, which is equal to the MPC of .8 times the previous level of income. Therefore, we can solve for the MPC using the formula MPC = ΔY/Yd (where Yd is disposable income) by setting it equal to .8 and solving for MPC.

At the first level, Y = 1000 and Yd = 800, so MPC = (1200-1000)/800 = .25 which is the marginal propensity to consume. Since the MPC + MPS = 1, we know that the marginal propensity to save (MPS) is 1 - .25 = .75. Therefore, the answer is C, with a marginal propensity to save of .2.

The Following Table Illustrates the Multiplier Process in a Private