Which one of the following saving functions corresponds to the investment multiplier of 5?
Answer & explanation
Correct answer: option 3
The correct answer is Option 3: S=-60+0.20Y
We know that value of k = 5
K= \(\frac{ 1}{MPS }\)
From this formulae we can find out the value of MPS.
putting the values in the formulae of multiplier:
5=\(\frac{ 1}{MPS }\)
Thus, MPS =\(\frac{1 }{ 5}\)
= 0.2
Value of MPS = 0.2
We know that the equation of saving function is as follows:
S= s + bY
Where S= total savings, s= autonomous savings, b= MPS and Y= Change in Income.
Thus, we will tick the answer which has 0.2 as MPS. Thus option 3 is correct.