If a fall in investment demand of 100 units causes equilibrium income to fall by 150 units in the simple Keynesian model,then the marginal propensity to save must be
A).25.
B)1.5.
C).5.
D)1/3.
E)2/3.

Question

Quizplus · Accepted Answer

In the simple Keynesian model, the multiplier (k) is given by 1/(1-MPC) or 1/MPS. The change in income (ΔY) is the multiplier times the change in investment (ΔI). Here, ΔY = 150 and ΔI = 100, so the multiplier k = 150/100 = 1.5. Therefore, MPS = 1/k = 1/1.5 = 2/3.

If a Fall in Investment Demand of 100 Units Causes