Chapter 11, Problem 1SPA

To determine

Identify the marginal propensity to consume, change in saving, and the marginal propensity to save.

Explanation of Solution

Marginal propensity to consume can be calculated as follows:

$\text{MPC}=\frac{\text{Change in consumption}}{\text{Change in disposible income}}$        (1)

Savings can be calculated as follows:

$\text{Savings}=\text{Disposible income}-\text{Consumption}$        (2)

Marginal propensity to save can be calculated as follows:

$\text{MPS}=\frac{\text{Change in savings}}{\text{Change in disposible income}}$        (3)

Using Equation-1, the marginal propensity to consume is calculated as follows:

$\begin{array}{c}\text{MPC}=\frac{\text{500}-420}{\text{500}-400}\\ =\frac{80}{100}\\ =0.8\end{array}$

Hence, the marginal propensity to consume is 0.8.

Using Equation-2, the savings is calculated as follows:

$\begin{array}{c}\text{Savings}=\text{100}-\text{80}\\ =20\end{array}$

Hence, the savings is $20 billion.

Using Equation-3, the marginal propensity to save is calculated as follows:

$\begin{array}{c}\text{MPS}=\frac{\text{20}}{\text{100}}\\ =0.2\end{array}$

Hence, the marginal propensity to save is 0.2.