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# effect of changing the savings rate on consumption

Dear OTA:

Please try to do the following for me. There is an attachment to this that has the info needed to answer these questions. I sincerely appreciate your help as I cannot calculate this information out. :-(
? Identify and describe the effect of changing the savings rate on consumption.
? Calculate the marginal propensity to consume after the change in the rate of savings.
? Calculate and describe the effect of changing the savings rate on the multiplier.
? Describe the likely changes to consumption and equilibrium GDP due to a decline in the savings rate.

#### Solution Preview

ยท Identify and describe the effect of changing the savings rate on consumption.
Y = C + I + G + NX
i.e., GDP = Consumption + Investment + Government + Net Export

At the equilibrium, GDP = total income, then the relationship between the total income and consumption is:
C = b * disposable income = b (Y - Tax)
where b = marginal propensity to consume (MPC) = 1 - marginal propensity to save = 1 - MPS

C = (1 - MPS) (Y - ...

#### Solution Summary

The effect of changing the savings rate on consumption is denoted.

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