Suppose economists observe that an increase in government purchases of $10 billion raises aggregate expenditures by $30 billion. These economists would estimate that the marginal propensity to save is:
A) 0.67.
B) 0.33.
C) 0.5.
D) 20.

Question

Quizplus · Accepted Answer

The multiplier effect is calculated as 1/(1-MPC), where MPC is the marginal propensity to consume. Given that the multiplier is 3 (since $10 billion in government spending increases expenditures by $30 billion), we can set up the equation 1/(1-MPC) = 3. Solving for MPC gives MPC = 0.67. Since MPS (marginal propensity to save) is 1 - MPC, MPS = 0.33.

Suppose Economists Observe That an Increase in Government Purchases of $10