Question

In an​ economy, when disposable income increases from​ $400 to​ $500, consumption expenditure increases from ​$420 billion to ​$500. Calculate the marginal propensity to​ consume, the change in​ saving, and the marginal propensity to save. The marginal propensity to consume is 0.80. ​>>> Answer to 2 decimal places. When disposable income increases from​ $400 billion to​ $500 billion, saving increases by ​$ 20 billion. The marginal propensity to save is 0.20. ​>>> Answer to 2 decimal places.

Answer 1

Answer:

MPC = 0.80

MPS = 0.20

Change in savings = $20 billion

Explanation:

Initial disposable income = $400

New disposable income = $500

Change in disposable income:

= New disposable income - Initial disposable income

= $500 - $400

= $100

Initial consumption expenditure = $420

New consumption expenditure = $500

Change in consumption expenditure:

= New consumption expenditure - Initial consumption expenditure

= $500 - $420

= $80

Marginal propensity to consume refers to the portion of the income to be consumed.

Therefore, the Marginal propensity to consume is calculated as follows:

= Change in consumption expenditure ÷ Change in disposable income

= $80 ÷ $100

= 0.80

The sum of marginal propensity to consume and save is one.

The marginal propensity to save refers to the portion of the income to be saved.

MPC + MPS = 1

0.80 + MPS = 1

Therefore, the marginal propensity to save is as follows:

MPS = 1 - 0.80

        = 0.20

Hence,

Change in Savings ÷ Change in disposable income = MPS

Change in Savings ÷ $100 = 0.20

Change in savings = 0.20 × $100

                               = $20 billion