Value of MPS (Marginal Propensity to Save) is increased from 0.4 to 0.5. What would be the impact on Multiplier?
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → The size of the multiplier would be decreased.
The formula for the multiplier is: Multiplier=1/ MPS
Given that the MPS increases from 0.4 to 0.5, it means people are saving more of their income, thus spending less. Since the MPS is in the denominator of the multiplier formula, an increase in the MPS leads to a decrease in the multiplier.