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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 0.05... 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) as shown in the table could be a rise in consumer confidence. As consumers feel more confident about their financial situation and the economy, they are likely to spend more of their income rather than save it. This is reflected in the declining mps from 2010 to 2015.
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
If the marginal propensity to save decreases, this would likely lead to an increase in the value of the multiplier. This is because a lower mps means that a greater proportion of additional income is being spent rather than saved, leading to more rounds of spending and greater overall economic activity.
Step 3
Which one of the following is the correct size of the multiplier?
Answer
The correct size of the multiplier can be calculated using the formula:
ext{Multiplier} = rac{1}{ ext{MPS} + ext{MPT} + ext{MPI}}
In this case, given MPS = 0.1, MPT = 0.2, and MPI = 0.1:
ext{Multiplier} = rac{1}{0.1 + 0.2 + 0.1} = rac{1}{0.4} = 2.5
Thus, the answer is D (2.5).