Question

If disposable income decreases from $1800 to $1500 and MPC = 0.75, then saving will: A. Increase by $225 B. Decrease by $225 C. Increase by $75 D. Decrease by $75

Answer 1

The calculation shows that the savings will decrease by $75 when the disposable income decreases from $1800 to $1500 with an MPC of 0.75. Therefore, option D is correct

The marginal propensity to consume (MPC) indicates how much of additional income will be spent. If MPC is 0.75, then the marginal propensity to save (MPS) is 1 - MPC, because every dollar of income is either saved or spent.

Let's calculate the MPS first:

`\[ \text{MPS} = 1 - \text{MPC} \]`

Since MPC = 0.75, then:

`\[ \text{MPS} = 1 - 0.75 = 0.25 \]`

This means that for every dollar of disposable income, $0.25 will be saved.

Now, let's calculate the change in savings when disposable income decreases from $1800 to $1500:

The change in disposable income (ΔY) is:

`\[ \Delta Y = Y_2 - Y_1 = \$1500 - \$1800 = -\$300 \]`

Since the disposable income has decreased by $300 and the MPS is 0.25, the change in savings (ΔS) would be:

`\[ \Delta S = \text{MPS} * \Delta Y \]`

Substituting the values, we get:

`\[ \Delta S = 0.25 * (-\$300) \]`

Let's calculate the change in savings.

The calculation shows that the savings will decrease by $75 when the disposable income decreases from $1800 to $1500 with an MPC of 0.75.

Therefore, the correct answer is:

D. Decrease by $75.