Assume there is no government or foreign sector. If the marginal propensity to save is 0.1, a $20 billion decrease in investment will cause equilibrium output to decrease by:

Question

Quizplus · Accepted Answer

The marginal propensity to save (MPS) is 0.1, so the marginal propensity to consume (MPC) is 0.9. The multiplier is 1/(1-MPC) = 1/0.1 = 10. Therefore, a $20 billion decrease in investment will decrease equilibrium output by $20 billion * 10 = $200 billion.

Assume There Is No Government or Foreign Sector