If the marginal propensity to save is 0.35. What is the size of the expenditure multiplier?Provide answer to one decimal point.
Question
If the marginal propensity to save is 0.35.
What is the size of the expenditure multiplier?
Provide answer to one decimal point.
Solution
The expenditure multiplier can be calculated using the formula:
Multiplier = 1 / (1 - Marginal Propensity to Consume)
However, in this case, we are given the Marginal Propensity to Save (MPS), not the Marginal Propensity to Consume (MPC). But we know that:
MPC + MPS = 1
So, we can calculate the MPC as follows:
MPC = 1 - MPS MPC = 1 - 0.35 MPC = 0.65
Now, we can calculate the multiplier:
Multiplier = 1 / (1 - MPC) Multiplier = 1 / (1 - 0.65) Multiplier = 1 / 0.35 Multiplier = 2.9
So, the size of the expenditure multiplier is 2.9.
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