In year 1, the level of production in an economy is recorded as R1000m and in year 2 it increases to R1800m.  Over the same period the level of consumption spending goes from R150m to R550m. Calculate the marginal propensity to consume. (3) Calculate the marginal propensity to save. (2)

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In year 1, the level of production in an economy is recorded as R1000m and in year 2 it increases to R1800m.  Over the same period the level of consumption spending goes from R150m to R550m.

  • Calculate the marginal propensity to consume. (3)
  • Calculate the marginal propensity to save. (2)

 

Expert Solution
Step 1

Marginal propensity to consume (MPC) measures the change in consumption spending due to changes in income level.

=> MPC = (change in consumption / change in income)

----

Marginal propensity to save (MPS) measures the change in saving due to changes in income level.

=> MPS = (change in saving / change in income)

----

Relationship between MPC and MPS

=> MPC + MPS = 1

 

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