In Opulencia, the marginal propensity to save is only 0.10. In an effort to promote the virtues of saving, the government starts a campaign encouraging citizens to increase their marginal propensity to save to 0.20. How would this greater saving affect the impact of the multiplier

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10-03-2020
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In Opulencia, the marginal propensity to save is only 0.10. In an effort to promote the virtues of saving, the government starts a campaign encouraging citizens to increase their marginal propensity to save to 0.20. How would this greater saving affect the impact of the multiplier

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amcool amcool · Answer 1 · 2020-03-11T02:37:56+01:00

Answer:

A greater saving will reduce the impact of the multiplier.

Explanation:

A multiplier generally refers to the factor that amplifies or increase the initial change of something else.

In economics, multiplier refers how change in spending or saving results into a larger change in local output and income.

Since addition of marginal propensity to consume (MPC) and marginal propensity to save (MPS) is equal to 1, the formula for calculating a multiplier can be stated as:

Multiplier = 1/(1 - MPC) or 1/MPS

From the question therefore, when MPS = 0.10, we have:

Multiplier = 1/0.10 = 10

When MPS is increases to 0.20, we have:

Multiplier = 1/0.20 = 5

Since 5 is less than 10, a greater saving will therefore reduce the impact of the multiplier.