Answer to Question #119929 in Microeconomics for Ammaralmoflahi

Question

Suppose that the money saved in the bank by the households is channelled to finance investments by the firms. What would be the impact on the aggregate expenditures if marginal propensity to consume (MPC) increased from 0.65 to 0.8?

Answer 1

• Investments will increase since the money saved by the households is channeled to finance investment .This will in turn increase consumers' income and then spend more so as to satisfy their needs and wants.
• If MPC increased from 0.65 to 0.8 this means that the consumption increased by 80 cents for each additional dollar of income then we can conclude that the higher the MPC, the higher the multiplier.