Suppose economists observe that an increase in government purchases of $10 billion raises aggregate expenditures by $40 billion. These economists would estimate that the marginal propensity to save is
A) 0.25.
B) 0.75.
C) 4.
D) 30.

Question

Quizplus · Accepted Answer

The marginal propensity to save (MPS) can be found using the multiplier formula, which is 1/(1-MPC) or 1/MPS. Given that a $10 billion increase in government purchases raises aggregate expenditures by $40 billion, the multiplier is 4 ($40 billion / $10 billion). Therefore, MPS = 1/4 = 0.25.

Suppose Economists Observe That an Increase in Government Purchases of $10