When the government of a country injects $100 into an economy by purchasing new military equipment, the total spending in the economy increases by $500. The marginal propensity to save for the economy is:
A) 0.2.
B) 0.4.
C) 0.6.
D) 0.8.

Question

Quizplus · Accepted Answer

The marginal propensity to save (MPS) can be calculated using the multiplier effect formula, which is 1/(1-MPC) or alternatively 1/MPS, where MPC is the marginal propensity to consume. Given that the total increase in spending is $500 from an initial government injection of $100, the multiplier is 5 (500/100). Therefore, MPS = 1/5 = 0.2.

When the Government of a Country Injects $100 into an Economy