If the marginal propensity to save (MPS) increased from 0.3 to 0.4, this would cause the multiplier effect to
A) decrease.
B) increase.
C) stay the same.
D) None of the above is correct.

Question

Quizplus · Accepted Answer

The multiplier effect is determined by the formula 1/(1-MPC), where MPC represents the marginal propensity to consume (MPC = 1 - MPS). If MPS increases, then MPC decreases, which in turn decreases the multiplier effect. Therefore, a higher MPS leads to a lower multiplier effect, and the correct answer is A.

If the Marginal Propensity to Save (MPS) Increased from 0