Marginal propensity to save (mps)

Definition

The marginal propensity to save (mps) refers to the fraction of additional income that a household saves rather than spends on consumption. It is a key concept in Keynesian economics, where it illustrates how changes in income affect saving behavior. Understanding mps helps in analyzing consumer behavior and predicting the impact of fiscal policies on overall economic activity.

5 Must Know Facts For Your Next Test

1. Mps is calculated by dividing the change in savings by the change in disposable income.
2. A higher mps indicates that households are saving a larger portion of their income, which can influence overall economic growth.
3. John Maynard Keynes argued that during recessions, mps tends to rise as consumers become more cautious about spending.
4. Mps is important for understanding the effectiveness of fiscal policies, as higher savings rates can lead to lower consumption and slower economic recovery.
5. In contrast, a lower mps suggests that households are more likely to spend additional income, stimulating demand in the economy.

Review Questions

• How does the marginal propensity to save (mps) relate to consumer behavior during economic downturns?
  • During economic downturns, the marginal propensity to save (mps) typically increases as consumers become more cautious with their spending. This shift occurs because uncertainty about future income leads households to prioritize savings over consumption. As a result, higher mps can slow down economic recovery since less money is being spent, which can affect overall demand and growth in the economy.
• Evaluate the implications of a high marginal propensity to save (mps) for fiscal policy effectiveness.
  • A high marginal propensity to save (mps) poses challenges for fiscal policy effectiveness. When households choose to save a larger portion of their income instead of spending it, government initiatives aimed at stimulating economic growth may have diminished impact. For example, tax cuts or direct payments intended to boost consumer spending might not yield the expected results if individuals are more inclined to save rather than consume. Policymakers must consider mps when designing interventions to encourage spending and stimulate economic activity.
• Analyze how changes in marginal propensity to save (mps) can affect overall economic stability and growth.
  • Changes in the marginal propensity to save (mps) can significantly impact overall economic stability and growth. An increase in mps can lead to reduced consumer spending, which may slow down economic growth and lead to higher unemployment rates. Conversely, if mps decreases, consumers are likely to spend more, which could spur demand and enhance economic recovery. Understanding these dynamics allows economists and policymakers to anticipate shifts in economic conditions and implement strategies that encourage stable growth while addressing potential volatility.

Related terms

Marginal Propensity to Consume (mpc): The marginal propensity to consume (mpc) is the fraction of additional income that is spent on consumption rather than saved.

Keynesian Economics: Keynesian economics is an economic theory that emphasizes total spending in the economy and its effects on output and inflation, particularly during periods of economic downturn.

Multiplier Effect: The multiplier effect refers to the process by which an increase in spending produces an increase in national income and consumption greater than the initial amount spent.