In a model with neither income taxes nor international trade,if the marginal propensity to consume in your classmate's nation is 3/5 and the marginal propensity to save in your country is 1/10,which of the following must be true?
A)Increases in government purchases increase real GDP demanded more per dollar in your country than they do in your classmate's country.
B)Decreases in government purchases increase real GDP demanded more per dollar in your country than they do in your classmate's country.
C)Increases in autonomous saving increase real GDP demanded more per dollar in your country than they do in your classmate's country.
D)Real GDP demanded is higher in your country than in your classmate's country.
E)Total saving is higher in your classmate's country than in your country.

Question

Quizplus · Accepted Answer

The spending multiplier is larger in your country because the marginal propensity to save (MPS) is smaller (1/10) compared to your classmate's country (MPS = 2/5). A smaller MPS leads to a larger multiplier effect, meaning government purchases have a greater impact on real GDP demanded in your country.

In a Model with Neither Income Taxes nor International Trade,if