According to the Bureau of Economic Analysis, during during the recession of 200

Question

According to the Bureau of Economic Analysis, during during the recession of 2007-2009 household saving as a fraction of disposable personal income increased from a low of just over 1 percent in the first quarter of 2008 to 5 percent in the second quarter of 2009. All else equal, what impact would this change in saving half on the MPC, MPS and multiplier? how would this change affect equilibrium output when planned investment changes. According to the Bureau of Economic Analysis, during during the recession of 2007-2009 household saving as a fraction of disposable personal income increased from a low of just over 1 percent in the first quarter of 2008 to 5 percent in the second quarter of 2009. All else equal, what impact would this change in saving half on the MPC, MPS and multiplier? how would this change affect equilibrium output when planned investment changes. According to the Bureau of Economic Analysis, during during the recession of 2007-2009 household saving as a fraction of disposable personal income increased from a low of just over 1 percent in the first quarter of 2008 to 5 percent in the second quarter of 2009. All else equal, what impact would this change in saving half on the MPC, MPS and multiplier? how would this change affect equilibrium output when planned investment changes.

Explanation / Answer

This change in (savings/disposable income ratio) will:

1. Increase marginal propensity to save, defined as change in saving resulting from a change in income

2. Decrease marginal propensity to consume, defined as change in consumption resulting from a change in income. Since MPC = 1 - MPS, an increase in MPS will decrease MPC.

3. Multiplier = 1 / MPS. So, as MPS increases, multiplier decreases.

4. Multiplier getting reduced, output will also decrease.

5. When planned investment changes, planned savings will also change in the same direction (Since planned investment = planned savings), and equilibrium output changes in the same direction.

Assuming MPS decreases, however, output will decrease.

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