Effect of increase in savings on MPC, MPS, multiplier and the output.

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Chapter 23, Problem 5.4P

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Effect of increase in savings on MPC, MPS, multiplier and the output.

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According to ihe Bureau of Ecnnomic Analysis, during the recession of 2007–2009, household saving as a fraction of disposable personal income increased from a low of just over I percent in ihe first quarter of 2008 to 5 percent in the second quarter of 2009. All else equal, what impact would this change in saving have on the MPC, MPS, and multiplier? How would ihis change affect equilibrium output when planned investment changes?

Fill in the aggregate saving column in the following table. Use the data in the table to calculate the con- sumption function and the saving function, and plot these functions as well as the 45-degree line on a graph. What are the values for the MPC and the MPS? Aggregate Income, Y Aggregate Consumption, C Aggregate Saving, S $ 0 $200 100 250 200 300 300 350 400 400 500 450 600 500

If autonomous consumption is 400 and the multiplier is 4, the saving function is equal to * S= 400 +4Yd S= -400 + 0.75Yd S= 400 +0.1Yd S= -400+0.25Y. Suppose disposable income increases from $7 trillion to $8 trillion. At the same time, consumption expenditure increases from $6.8 trillion to Thus the MPC must equal $7.8 trillion; 0.60 $7.6 trillion; 0.80 $7.4 trillion; 0.40 $8 trillion; 1.00