Answer:
Since the multiplier is now higher than before, this change in MPS will therefore make the real gross domestic product (GDP) to increase.
Explanation:
Old marginal propensity to save = 0.25
Old marginal propensity to consume = 1 - 0.25 = 0.75
Old multiplier = 1 / Old marginal propensity to save = 1 / 0.25 = 4
New marginal propensity to save = 0.20
New marginal propensity to consume = 1 - 0.20 = 0.80
New multiplier = 1 / New marginal propensity to save = 1 / 0.20 = 5
Change in multiplier = New multiplier - Old multiplier = 5 - 4 = 1
Therefore, the decrease in marginal propensity to save (MPS) will increase marginal propensity to consume (MPC) form 0.75 to 0.80 and the multiplier from 4 to 5.
Since the multiplier is now higher than before, this change in MPS will therefore make the real gross domestic product (GDP) to increase.
