Quiz 10: Basic Macroeconomic Relationships

Business

a. Disposable income is divided into consumption and saving. img The table is reproduced as follows: img APC is average propensity to consume. Its formula is as follows: img APS is the average propensity to save. Its formula is as follows: img MPC is the marginal propensity to consume. Its formula is as follows: img MPS is the marginal propensity to save. Its formula is as follows: img The table is reproduced as follows: img b. Break-even level of income is the income which equals to consumption. In this question the break-even level of income is $260. At the $240 level income consumption is higher than income and saving is negative. The economic term for this situation is dissaving. c. As income changes, MPS and MPC are constant, whereas APC and APS are variables. APC increases as income increases and APS decreases as income increases.

The variables in a graph of consumption schedule are disposable income and consumption level. The consumption level is on the vertical axes and the disposable income on the horizontal axes. The variables in a graph of saving schedule are disposable income and saving level. The saving level is on the vertical axes and the disposable income on the horizontal axes. The variables are positively related in both saving schedule and consumption schedule. The higher the income is, the higher the consumption and saving is. The fundamental reason for the increase of both consumption and saving is the increase of disposable income. The reason for the increase of disposable income is the increase of productivity and GDP.

MPC is the marginal propensity to consume. It measures the change in consumption caused by the change in income. img MPS is the marginal propensity to save. Its formula is as follows: img APC is average propensity to consume. Its formula is as follows: img After the increase of income APC is calculated as follows: img