As the savings rate in the private sector rises:
A) the government spending multiplier will also rise.
B) aggregate demand will be less responsive to changes in fiscal policy.
C) increases in government spending become a more effective means of stimulating aggregate demand.
D) the crowding out effect will have more of a negative effect on aggregate demand.

Question

Quizplus · Accepted Answer

As the savings rate in the private sector rises, the government spending multiplier will also rise. This is because the government spending multiplier is equal to 1/(1-MPC), where MPC is the marginal propensity to consume. As the savings rate rises, the MPC falls, which means that the denominator of the government spending multiplier becomes smaller. This makes the government spending multiplier larger.

As the Savings Rate in the Private Sector Rises