The question is incomplete. The complete question is stated below.
If the marginal propensity to consume is equal to 0.85, then a $500 increase in disposable income leads to a:
a. $400 increase in consumption spending
b. $75 increase in consumption spending
c. $425 increase in personal saving
d. $75 increase in personal saving
Answer:
If a $500 increase causes an increase of $425 in consumer spending, the rest of $75 is the increase in personal saving. Thus, option D is the correct answer.
Explanation:
The marginal propensity to consume or MPC is the percentage of the additional income that will be used for consumption spending. It is a concept that is used to calculate how much of an increase in income will be used in consumption and saving. The formula to calculate MPC is,
MPC = Change in consumer spending / Change in income
0.85 = Change in consumer spending / 500
500 * 0.85 = Change in consumer spending
Change in consumer spending = $425
If a $500 increase causes an increase of $425 in consumer spending, the rest of $75 is the increase in personal saving.
Principal = 1400
