Question

People decide to save 25 percent of their incomes. The value of the marginal propensity to consume is ________ and the value of the spending multiplier is ________.

Answer 1

Answer:

0.75

4

Explanation:

Marginal propensity to consume is the proportion of income that is consumed.

It is assumed that deposable income is either saved or spent.

So if 25% of income is saved, (100% - 25%) 75% is spent.

Spending multiplier = 1 / marginal propensity to save = 1 / 0.25 = 4