marginal progensity to save (MP) of 20 par The Parados of Thri \"A penmy asved l
ID: 1111749 • Letter: M
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marginal progensity to save (MP) of 20 par The Parados of Thri "A penmy asved la penny eared." id Benjamin Pranklin in an Malsipser LEPS Sa, the greater the propenaity to save the decline. Why Conaider the llowing ing that hard times and recemmion were savings so that now 15 billion less is spen and viee vere In ether t, the multi Letssuppose that the Amerioan publis, lear words, if the Mis were 25 plier would be 4 Qecause 1/25-4), and a addition to apending ef $4 million would svernge rnteof result in a betal aidicion te income of 816 mil s lion. Similarly, with an MI of 10 pereent the than bedore. Anemi multiplier would be 10 and tbe $4 million resulted in an addicional 840 spending and the marginal propes would have ty to save remain the same (20 percenti. I sumer spending will reault in a decrense of $20 bilion in total income. In other worda, Af everyone tried to sane more, phere wosld be The mulsiplier elfect alao workcs in reverse. A e reduction in spending by any of the compo less money avaiiable and less swould be saved the GNI. Hore aguin, the size of the mult er will depend ee how much of their Economists refer to this apparenily contradie tory, but nonethelees Eactual, statement as the the time, or their MPS Questions for Understanding 1. What is the multiplier efkt, dans 40 inem a-te.. expenditure dm inowen 2 How does the marginal propensity to save affeet the maltiplier 3. With a marginal propensity to save of 33ks percent, what would be the efflect on total inceme of an increase in basiness investment of $3 billion? l. In the midst of an economic contraction, an American President advised the nation's consumers to, spend their way out of the recession." What did the President mean by that? The multiplier enhances the government's smonetary and fscal policies. Expiain this stuatement. 150Explanation / Answer
1) The multiplier is a ratio of increment in income to the increment in investment. It means that a total increase in investment or injection into the economy will lead to a manifold increase in the income. For example, Microsoft thought of investing $1 billion and make new software in the US then the US will not just benefit by that $1 billion but many folds of that amount spent. How much ?? depends on the amount consumed and saved out of that one billion.
2) MArginal propensity to save is considered as a leakage from the multiplier process. For example, if a person earns $100 every day and saves all then the multiplier will be Zero.
3) With marginal propensity to save being 33.3% the investment of # billion will lead to consumption of $2 billion that is the 66.6% off the total amount and saving of $1 billion(MPS).
4) If a president advised the people to spend more then he meant that more spending or consumption will strengthen the multiplier process. Saving is locking the capital and bringing the consumption down. Causing the economy to suffer a recession in this case paradox of thrift because of excess saving.
5) Yes, the multiplier enhances the monetary and fiscal policy of the government because of the multiplier effect the expansionary monetary and fiscal policy will increase the output in the economy by multiple amounts. For example, a $10 billion injection into the economy can increase the output 4 times if the multiplier is 4.
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