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MPS, MPC and Spending Multiplier: How to calculate

Given that the marginal propensity to consume (MPC) is .875:

(1) What is the marginal propensity to save (MPS)?

(2) Calculate the spending multiplier.

(3) If the government stimulates the economy via new spending of $150 million:

(a) What is the total projected spending that this could generate throughout the economy?
(b) What incremental spending would be generated?

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Solution Preview

1. MPS = 1 - MPC = 1 - 0.875 = 0.125

2. Spending Multiplier = 1/MPS = 1/0.125 ...

Solution Summary

Given an economy's Marginal Propensity to Consume (MPC), this solution shows how to calculate the economy's Marginal Propensity to Save (MPS), Spending Multiplier (SM), and the total and incremental increase in spending in the economy that results from an increase in government spending. All formulas and calculations are given in full.