Question

Equilibrium output will rise with which of the following shocks?

	an increase in the marginal propensity to save
	a decrease in the marginal propensity to save
	an increase in taxes
	an increase in the marginal propensity to consume
	a decrease in the marginal propensity to consume

Answer 1

Answer :

Equilibrium output will rise when :

A decrease in the marginal propensity to save : A decrease in MPS means people are saving less and that increases the level of consumption, more consumption means more demand and thereby equilibrium output will rise

An increase in marginal propensity to consume : An increase in MPC again directly increases consumption level as more part of the disposable income goes for consumption purposes. Again this increase in consumption increases demand and thereby equilibrium output will rise.

In the remaining cases equilibrium output is supposed to fall.