Answer to Question #236567 in Macroeconomics for Econ

Question

 In a given economy, consumption increases by $2.5 trillion following a $4 trillion increase in disposable income. What is the marginal propensity to save in that economy?

0.375

2.67

1.5

0.625

Answer 1

The marginal propensity to save is 0.375. It is obtained by diving the change in savings with the change in income. In this case, the change in savings is $($4-$2.5)$ trillion because savings is given by subtracting consumption from disposable income. Which is $1.5 trillion. The disposable income increases by $4trillion, which is the change in income. Thus, the marginal propensity to save (MPS) is calculated as follows.

$MPS =\dfrac{1.5}{4} = 0.375$