If the marginal propensity to consume (MPC)is 0.75 and there is an increase in planned investment spending of $0.5 trillion, then saving will
A)increase by $0.25 trillion.
B)increase by $0.5 trillion.
C)increase by $1 trillion.
D)remain unchanged.

Question

Quizplus · Accepted Answer

The MPC is the fraction of additional income that is spent on consumption. Therefore, if planned investment spending increases by $0.5 trillion, then aggregate income will increase by $0.5 trillion as well. The MPC of 0.75 indicates that 75% of this increase in income will be spent on consumption, which is equal to $0.375 trillion. The remaining 25% of the increase in income will be saved, which is equal to $0.125 trillion. Therefore, saving will increase by $0.125 trillion, which is equivalent to the increase in planned investment spending. Thus, the correct option is (B) increase by $0.5 trillion.

If the Marginal Propensity to Consume (MPC)is 0