Scenario 10.1 Imagine an economy that does not have international trade and is originally in equilibrium.Then the government increases the level of spending by $350 million because it received a gift from abroad.In this economy, only 65 cents of every dollar is spent, and the rest is saved.
Refer to Scenario 10.1.What is the marginal propensity to save for this economy?

Question

Quizplus · Accepted Answer

The marginal propensity to save is the fraction of each additional dollar of income that is saved, and is calculated as 1 – MPC, where MPC is the marginal propensity to consume. Since only 65 cents of every dollar is spent, the MPC is 0.65. Therefore, the marginal propensity to save is 1 – 0.65, which is 0.35.