Question

Suppose that disposable income, consumption, and saving in some country are $200 billion, $150 billion, and $50 billion, respectively. Next, assume that disposable income increases by $20 billion, consumption rises by $18 billion, and saving goes up by $2 billion. What is the economy's MPC?Its MPS? What was the APC before the increase in disposable income? After the increase?

Answer 1

Answer and Explanation:

The computation is shown below:

Marginal Propensity to Consume (MPC) = change in consumption  change in disposable income

= $18 billion ÷  $20 billion

= 0.9

Marginal Propensity to Save (MPS) = change in saving ÷ change in disposable income

= $2 billion ÷ $20 billion

= 0.10

b) APC before the increase in disposable income

The average propensity to consume (APC) = Consumption (C) ÷ Disposable income (Y)

= $150 billion ÷ $200 billion

= 0.75

For After the increase in the disposable income, first we have to determine the new disposable income and the  new consumption which is

New disposable income is

= $200 billion + $20 billion

= $220 billion

And,

New consumption is  

= $150 billion + $18 billion

= $168 billion

Now

APC = new consumption ÷new disposable income

= $168 billion ÷ $220 billion

= 0.76

We simply applied the above formulas