# 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.

https://brainmass.com/economics/exchange-rates/167740

#### Solution Preview

· Identify and describe the effect of changing the savings rate on consumption.

Let's start with the GDP function:

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.