Question

Suppose that disposable income, consumption, and saving in some country are $800 billion, $700 billion, and $100 billion, respectively. Next, assume that disposable income increases by $80 billion, consumption rises by $64 billion, and saving goes up by $16 billion. What is the economys MPC? Its MPS?

Answer 1

Answer:

MPC = 0.8

MPC = 0.2

Explanation:

Marginal propensity to consume is the proportion of an increase in income that is spent on consumption.

Marginal propensity to consume = increase in consumption / increase in disposable income

Marginal propensity to save is the proportion of an increase in income that is saved.

Marginal propensity to save = increase in savings / increase in disposable income

Disposable income is either consumed or saved. so,

Marginal propensity to consume + marginal propensity to save = 1

Marginal propensity to consume = $64 / $80 = 0.8

Marginal propensity to save = $16 / $80 = 0.2

I hope my answer helps you

Answer 2

Answer: MPC = 0.8 ; MPS = 0.2

Explanation:

Given the following ;

Increase in disposable income = $80 billion

Increase in consumption = $64 billion

Increase in savings = $16 billion

The disposable income of a country can be regarded as the that part of a country's or an individual's income which isn't subject to any sort of deduction such tax which one can decide to save, spend on consumption or investment.

Marginal Propensity to Consume(MPC) = ratio of the tendency of an economy or individual to spend on consumption with change in value or amount of disposable income

MPC = Increase in consumption /increase in disposable income

MPC = $64 billion / $80 billion = 0.8

2. Marginal Propensity to Save(MPS) = ratio of the tendency of an economy or individual to save its income with change in value or amount of disposable income

MPS = Increase in saving /increase in disposable income

MPS = $16 billion / $80 billion = 0.2

Summing up both MPS and MPC will always give a value of 1, As disposable income are always placed in either of the two categories : Consumption or Saving.