Question

If the marginal propensity to consume is 0.75, a $40 increase in disposable income will lead to a _____ increase in consumption and a ___$ increase in savings. (Enter both responses rounded to two decimal places.)

Answer 1

If the marginal propensity to consume is 0.75, a $40 increase in disposable income will lead to a $30 increase in consumption and a $10 increase in savings.

Step-by-step explanation:

The marginal propensity to consume (MPC) is the proportion of additional income that is spent on consumption. In this case, the MPC is 0.75, which means that 75% of the $40 increase in disposable income will be spent on consumption. Therefore, the increase in consumption will be $40 * 0.75 = $30. The increase in savings can be calculated by subtracting the increase in consumption from the increase in disposable income, which is $40 - $30 = $10.