If the marginal propensity to save is 0.8, calculate the multiplier?

Analyze the question

You are given the marginal propensity to save (MPS = 0.8) and asked to find the multiplier.

Concept

The investment multiplier measures how much national income changes for each unit change in injected spending:

Multiplier (k) = 1 / (1 − MPC) = 1 / MPS

where MPC is the marginal propensity to consume, and MPC + MPS = 1.

Solution

1. MPS = 0.8
2. MPC = 1 − 0.8 = 0.2
3. k = 1 / MPS = 1 / 0.8 = 1.25

Check using MPC: k = 1 / (1 − 0.2) = 1 / 0.8 = 1.25 ✔

Answer

The multiplier is 1.25.

Option B (5.00) is a trap: it is what you get if MPS were 0.2 (1 / 0.2 = 5). Don't mix up MPS and MPC.

Exam tip

Remember "Multiplier = 1 over MPS." A big MPS means a small multiplier, because more money leaks out into savings. Since MPS = 0.8 is large, the multiplier must be small, just above 1. This lets you eliminate B straight away.