Question

If the consumption function is of the form C = 80 + 0.4Y, the MPS equals

A.-0.6.
B. 0.6.
C.-0.4.
D. 0.4.

Answer 1

The Marginal Propensity to Save (MPS) is the fraction of additional income that is saved rather than consumed. In this case, the consumption function is given by C = 80 + 0.4Y. The slope of the consumption function is the marginal propensity to consume (MPC), which is equal to the coefficient of Y, which is 0.4. Since MPS + MPC = 1, the value of MPS is 0.6.

Step-by-step explanation:

The Marginal Propensity to Save (MPS) is the fraction of additional income that is saved rather than consumed. It represents the change in savings resulting from a change in income. In this case, the consumption function is given by C = 80 + 0.4Y. The slope of the consumption function is the marginal propensity to consume (MPC), which is equal to the coefficient of Y, which is 0.4. Since MPS + MPC = 1, the value of MPS is 1 - 0.4 = 0.6. Therefore, the correct answer is B. 0.6.