Question

Suppose that disposable income is $1,000, consumption is $700, and the marginal propensity to consume (MPC) is 0.6. If disposable income then increases by $100, consumption and savings will equal which of the following

Answer 1

Answer:

E. Consumption = $ 760

Savings = $ 340

Explanation:

Given that,

Disposable Income = 1000

Consumption = 700

MPC = 0.6

Change in disposable income= 100

Recall that

MPC = Change in consumption ÷ change in disposable income.

Therefore

change in consumption = MPC × Change in disposable income.

Thus

Change in C = 0.6 × 100

= 60

Therefore

CONSUMPTION = 700 + 60

= $ 760

Again, recall that

I = C + S

Where I = Income and S = Savings

Therefore

S = I - C

I = 1000 + 100 = 1100

C = 760

S = 1100 - 760

SAVINGS = $ 340

C = $760

S = $340