Use the information below to answer the following questions.
Fact 27.1.1
In an economy, when disposable income increases from $400 billion to $500 billion, consumption expenditure increases from $480 billion to $540 billion.
-Consider Fact 27.1.1. The marginal propensity to save is
A)0.75.
B)0.80.
C)0.60.
D)0.40.
E)0.25.

Question

Quizplus · Accepted Answer

The marginal propensity to save (MPS) is defined as the fraction of a change in income that is saved, rather than spent on consumption.

MPS = Change in Saving / Change in Income

Given that disposable income increases from $400 billion to $500 billion, the change in income is $100 billion.

Also, given that consumption expenditure increases from $480 billion to $540 billion, the change in saving is $60 billion (since the rest of the increase in income is spent on consumption).

Therefore,

MPS = Change in Saving / Change in Income = $60 billion / $100 billion = 0.6

So the answer is D (0.40).

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