Question

Suppose that uncertainty about the economic impact of the pandemic causes the public to adjust by saving more to use in case of a lenghty economic downturn worldwide. Comment on the impact to the multiplier and Real GDP.

Answer 1

Multiplier is the process of change in one economic variable, which have a cyclic effect and again results in the change in the same variable automatically by changing one or more variables. For example - Investment multiplier is the increase in investment by increasing production, consumption, income and again investment.

Real GDP is the monetary value of all the goods and services produced in an economy in a year, adjusted to the inflation rate.

Uncertainty about the economic impact of pandemic causes the public to adjust by saving more to use in case of a lengthy economic downturn worldwide. Saving increases means-

An increase in the Marginal Propensity to Save MPS.

Now, As we know that Multiplier (M) is inversely proportional to MPS i.e.

M=1/MPS

So, as saving increases the value of multiplier will decrease.

We also know that the GDP is directly related to the value of Multiplier, So if there is decrease in value of multiplier, the value of GDP will decrease.

So, we can say that as saving increases the value of Real GDP decreases.