Chapter 8, Problem 1.1P

To determine

The relationship between MPC and MPS and aggregate output and aggregate income.

Explanation of Solution

Option (a):

MPC is the marginal propensity to consume which represents that portion of change in income that is consumed or spent.

Option (b):

MPS is the marginal propensity to save which represents that portion of change in income that is saved.

Option (c):

Aggregate output refers to the total quantity of goods and services produced over a given period of time in an economy.

Option (d):

Aggregate income refers to the total amount received by all factors of production in a given time period.

The relationship between MPC and MPS can be established as follows:

Since all the income is either consumed (spent) or saved; $\text{MPC}\text{}+\text{MPS}=\text{1}$ .

The relationship between aggregate output and aggregate income is that both are actually the same thing viewed from different points.

Economics Concept Introduction

Concept introduction:

Marginal propensity to consume (MPC): Marginal propensity to consume refers to the sensitivity of change in the consumption level due to the changes occurred in the income level.

Marginal propensity to save (MPS): The ratio of change in saving when there is a change in disposable income.