MPC stands for Marginal Propensity to Consume.
MPS stands for Marginal Propensity to Save
MPS + MPC = 1
MPS = 1 - MPC
MPC = 1 - MPS
Given:
Change in Consumption: Increase investment by 8 billion
MPC = Change in Consumption / Change in Disposable Income
Multiplier = 1/(1-MPC) or 1/MPS
a)
MPS = 1 - MPC = 1 - 0.80 = 0.20
Multiplier = 1/0.20 = 5
8 billion x 5 = 40 billion is the change in GDP.
b)
MPS = 1 - MPC = 1 - 0.67 = 0.33
Multiplier = 1/0.33 = 3.03
8 billion x 3.03 = 24.24 billion is the change in GDP.
