Question

What is the multiplier when the marginal propensity to save is 1/3?
What would happen to the marginal propensity to save when a tax cut was enacted causing the multiplier to change to 5?

Answer 1

Answer:

MPS=1/3

Explanation:

multiplier=1/1-MPS

MM=1/1-1/3

MM=3/2=1.5 times

5=1/1-MPS

5-5MPS=1

4=5MPS

4/5=MPS

MPS=0.8

Answer 2

Answer:

By increasing the amount of money in the economy, the central bank encourages private consumption. Increasing the money supply also decreases the interest rate, which encourages lending and investment. The increase in consumption and investment leads to a higher aggregate demand.