If the government increased its purchases of goods and services by $12,000, and this resulted in an eventual increase in GDP and income of $60,000, the MPS would be equal to
A) 0.2.
B) 0.4.
C) 0.8.
D) 2.

Question

Quizplus · Accepted Answer

The marginal propensity to save (MPS) can be calculated using the multiplier formula, which is 1/(1-MPC) or alternatively 1/MPS since MPS + MPC = 1. The multiplier in this scenario is the ratio of the total increase in GDP ($60,000) to the initial increase in government spending ($12,000), which equals 5. Therefore, MPS = 1/5 = 0.2.

If the Government Increased Its Purchases of Goods and Services