Question

Suppose that a consumer has a marginal propensity to save of 0.3. If this consumer earns an extra 200 Tk, her consumption spending would be expected to increase by:

A. 60
B. 70
C. 140
D. 170

Answer 1

When a consumer with a marginal propensity to save of 0.3 earns an extra 200 Tk, their consumption spending is expected to increase by 140 Tk.

Step-by-step explanation:

If a consumer has a marginal propensity to save (MPS) of 0.3, it means that for each additional unit of income, 30% will be saved and the remaining 70% will be spent. When looking at an extra income of 200 Tk, the increased consumption spending can be calculated by using the marginal propensity to consume (MPC), which is the flip side of MPS. Since MPS + MPC = 1, if MPS is 0.3, then MPC is 0.7. Therefore, the consumer's consumption spending would increase by 200 Tk * 0.7, which is 140 Tk.