> #economics , #personal-finance > How can a larger marginal propensity to save affect the size of the multipleir?
###### Ntando Phungwayo
more than 4 weeks ago

# How can a larger marginal propensity to save affect the size of the multipleir?

?
1 view

Sort By
ChatGPT
more than 4 weeks ago
A larger marginal propensity to save means that individuals are saving a larger portion of their income rather than spending it. This can have a negative impact on the size of the multiplier effect.

The multiplier effect is a concept in economics that measures the impact of an initial change in spending on the overall economy. When individuals save more of their income, they are not spending it on goods and services, which reduces the overall level of consumption in the economy. This reduction in consumption leads to a decrease in aggregate demand, which can result in lower levels of economic activity and growth.

Therefore, a larger marginal propensity to save can reduce the size of the multiplier effect because it limits the amount of money circulating in the economy and reduces the overall impact of an initial change in spending. This can lead to a smaller increase in economic output and employment compared to a situation where individuals have a lower propensity to save and are more inclined to spend their income.
0
more than 4 weeks ago
A larger marginal propensity to save (MPS) reduces the size of the multiplier.

Explanation:

The multiplier is a formula that calculates the total change in an economic variable, such as GDP, resulting from a change in a component of spending, such as investment:

Multiplier = 1 / (1 - MPS)

-MPS- represents the proportion of additional income that people choose to save rather than spend.

When the MPS is larger, it means that a higher proportion of any additional income is saved. Hence, the denominator of the multiplier equation becomes larger.

A larger denominator reduces the overall value of the multiplier. This is because a larger MPS reduces the amount of additional spending that results from each unit of initial spending.

In other words, with a higher MPS, people save more of their extra income, which limits the amount of money that is available for spending and economic growth. As a result, the multiplier effect is smaller.

Example:

Let's say the initial investment increase is \$100.

- MPS = 0.2 (20%): Multiplier = 1 / (1 - 0.2) = 1.25
- MPS = 0.5 (50%): Multiplier = 1 / (1 - 0.5) = 2

In this example, the multiplier is 2.5 times larger when MPS is 20% compared to when it is 50%. This illustrates the inverse relationship between MPS and the size of the multiplier.
0
×