If the MPC = 0.9, a $10 million increase in savings will change GDP in the following manner:

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Quizplus · Accepted Answer

The marginal propensity to consume (MPC) is 0.9, meaning that 90% of additional income is spent. The marginal propensity to save (MPS) is 0.1 (1 - MPC). A $10 million increase in savings implies a decrease in consumption by $10 million. The multiplier effect is 1/MPS = 1/0.1 = 10. Therefore, GDP will decrease by $10 million * 10 = $100 million.