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Given an overall level of investment and government deficit spending, the more people save, A.The quicker...

Given an overall level of investment and government deficit spending, the more people save, A.The quicker they’ll be in a better financial position b.The higher rates of interest will be C. The happier and more virtuous they’ll be D. The lower overall output will be IS ANSWER A CORRECT?

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Answer #2

NO, it is D.

the more people save the lower the level of output will be. consider the overall level of government be 100 and investment be 100. If they are spending more the MPC or the marginal propensity to consume will rise, At a higher consumption the multiplier will be higher. so lets say the consumption is 80% and saving 20%, then MPC will be 0.8 and the multiplier will be K=1/1-MPC = 1/1-0.8 = 5. any increase in the spending wil lead to an increase in the GDP by 5 times.

If the spending falls and the saving rise lets say saving 80% and consumption 20%. MPC is 0.2 and the mutliplier will be 1.25. so, any increase in the spending will only increase the overall output by 1.25. answer is "D".

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