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The table below shows marginal propensity to save data for an economy - Edexcel - A-Level Economics A - Question 2 - 2017 - Paper 2
Question 2
The table below shows marginal propensity to save data for an economy. Year Marginal propensity to save (mps) 2010 0.11 2011 0.09 2012 0.07 2013 0.0... show full transcript
Worked Solution & Example Answer:The table below shows marginal propensity to save data for an economy - Edexcel - A-Level Economics A - Question 2 - 2017 - Paper 2
Step 1
Explain one possible reason for the changes in the marginal propensity to save as shown in the table.
Answer
One possible reason for the decrease in the marginal propensity to save (mps) is an increase in consumer confidence. As consumers feel more secure about their financial situation and the economy, they tend to spend more, leading to a decrease in savings. Furthermore, low interest rates can reduce the incentive to save because the returns are lower, prompting consumers to spend more of their income.
Step 2
Explain the likely effect of a fall in the marginal propensity to save on the value of the multiplier if other things remain equal.
Answer
A fall in the marginal propensity to save is likely to increase the value of the multiplier. This is because a lower mps leads to a higher marginal propensity to consume, meaning that for each additional dollar of income, more money is spent rather than saved. Consequently, this results in a larger overall increase in economic activity per unit of initial spending.
Step 3
Which one of the following is the correct size of the multiplier?
Answer
The correct answer is D 2.5. The multiplier can be calculated using the formula: ext{Multiplier} = rac{1}{ ext{MPS} + ext{MPT} + ext{MPI}} In this case, with a marginal propensity to save (MPS) of 0.1, a marginal propensity to tax (MPT) of 0.2, and a marginal propensity to import (MPI) of 0.1, we have:
ext{Multiplier} = rac{1}{0.1 + 0.2 + 0.1} = rac{1}{0.4} = 2.5