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
