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28 July, 18:47

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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  1. 28 July, 18:54
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    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.
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