Explore BrainMass
Share

# effect of changing the savings rate on consumption

This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

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.

© BrainMass Inc. brainmass.com October 9, 2019, 8:57 pm ad1c9bdddf
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.

\$2.19