# Ch12Answers - CHAPTER 12 FISCAL POLICY PROBLEMS 1 If the...

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FISCAL POLICY PROBLEMS 1. If the marginal propensity to save is 0.05, how large is the multiplier?  If the  marginal propensity to save doubles to 0.10, what happens to the multiplier? With an MPS of 0.05, the MPC is 0.95.  Since the multiplier is  1/(1-MPC) = 1/MPS = 1/0.05 = 20.  If the MPS doubles to 0.10, the  multiplier decreases to 10. 2. If the MPC were 0.80, how much spending would occur at step 5 in Figure 12.6?  How many spending rounds would occur before consumer spending increased by  \$200 billion If the MPC were 0.80, then the multiplier would be 1/(1-MPC) = 1/(1-.8) =  1/.2=5.  In step 4 of figure 12.6, households would receive \$100 billion in  new income.  Of this \$100 billion, they will spend 80 percent and save 20  percent.  As a result, they will spend \$80 billion dollars in step 5.  Consumer

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