The equilibrium level of real GDP in a country is $480 billion. Suppose that planned investment decreases by $5 billion. This decrease causes real GDP to shift to a new equilibrium level of $470 billion. A. What will be the size of the spending multiplier for this country?
B. What is the marginal propensity to save (MPS) for this country?

A. Spending multiplier for this country = 2

B. Marginal propensity to save (MPS) for this country = 0.5

Explanation:

A. What will be the size of the spending multiplier for this country?

This can be calculated as follows:

Change in real GDP = New real GDP – Old real GDP = $470 billion - $480 billion = -$10 billion

Change in planned investment = -$5 billion

Marginal propensity to spend = Change in planned investment / Change in real GDP = -$5 billion / -$10 billion = 0.5

Spending multiplier for this country = 1 / (1 - Marginal propensity to spend) = 1 / (1 – 0.5) = 1 / 0.5 = 2

B. What is the marginal propensity to save (MPS) for this country?

This can be calculated as follows:

Marginal propensity to save (MPS) = 1 - Marginal propensity to spend

Marginal propensity to save (MPS) = 1 – 0.5

Marginal propensity to save (MPS) = 0.5

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