Marginal Propensity to Save (MPS)
What is Marginal Propensity to Save (MPS)?
The marginal propensity to save (MPS) is the fraction of each additional dollar of disposable income that households save.
It ranges between 0 and 1 and, together with the marginal propensity to consume, always sums to 1. A higher MPS means a smaller spending multiplier. It measures how much of new income leaks out of the spending stream.
Marginal Propensity to Save (MPS): a worked example
Disposable income rises from $48,000 to $60,000, an increase of $12,000. Household saving rises from $3,400 to $6,400, an increase of $3,000. MPS = $3,000 ÷ $12,000 = 0.25. Since MPC = 1 - MPS, the MPC is 0.75, which the spending figures confirm: the household spent $12,000 - $3,000 = $9,000 of the raise, and 9,000 ÷ 12,000 = 0.75. The spending multiplier is 1 ÷ MPS = 1 ÷ 0.25 = 4, so a $12 billion cut in government purchases reduces real GDP by 12 × 4 = $48 billion. Raise the MPS to 0.4 and the multiplier drops to 1 ÷ 0.4 = 2.5, so the same $12 billion cut costs only $30 billion of output. Bigger leakage, weaker fiscal policy.
The mistake students make with marginal propensity to save (mps)
Written as 1 ÷ (1 - MPS), the multiplier formula produces nonsense that still looks like a formula, which is why the error survives a second glance. An MPS of 0.25 gives 1 ÷ 0.75 = 1.33 instead of the correct 1 ÷ 0.25 = 4. Only the MPC version subtracts: use 1 ÷ (1 - MPC) or 1 ÷ MPS, never a mixture of the two. A second slip is reaching for the MPS when a question asks for the money multiplier. Deposit expansion runs on the required reserve ratio and has nothing to do with household saving decisions.
Marginal Propensity to Save (MPS) questions
How do you find MPS from MPC?
Subtract the MPC from 1. Every extra dollar of disposable income is either spent or saved in this model, so MPC + MPS = 1. An MPC of 0.9 gives an MPS of 0.1, and an MPC of 0.6 gives an MPS of 0.4. The relationship runs both directions, so a question that supplies the MPS also tells you the consumption behavior you need.
Why does a higher MPS make the multiplier smaller?
Saving is a leakage from the circular flow. A dollar set aside in one round is not income for anyone in the next round, so the chain of re-spending dies out faster. The simple spending multiplier is 1 ÷ MPS, so an MPS of 0.1 produces a multiplier of 10 while an MPS of 0.5 produces only 2. The same government spending buys far less extra output when households save more of what they receive.
What is the difference between MPS and the savings rate?
MPS measures the fraction of an additional dollar of disposable income that goes into saving, while the savings rate measures total saving divided by total disposable income. A household saving $6,400 out of $60,000 has an average rate near 10.7 percent, yet it might put a quarter of its next raise away, an MPS of 0.25. Marginal behavior, not the historical average, drives the multiplier.
Formula / Example
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