If that the marginal propensity to save (MPS)increased from 0.20 to 0.25, this would cause the multiplier effect to
A)decrease.
B)increase.
C)stay the same.
D)None of the above is correct.

Question

Quizplus · Accepted Answer

The multiplier effect is directly related to the marginal propensity to consume (MPC), which is the amount of each additional dollar earned that is spent rather than saved. The MPC is equal to 1 minus the MPS. Therefore, as the MPS increases from 0.20 to 0.25, the MPC decreases from 0.80 to 0.75. Since the multiplier effect is calculated as 1 divided by the MPS, a higher MPS will result in a smaller multiplier effect. Thus, the multiplier effect will decrease as the MPS increases.

If That the Marginal Propensity to Save (MPS)increased from 0