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24 June, 15:48

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.

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  1. 24 June, 15:54
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    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
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