Question

You are given the following Consumption function: C=200+0.8Y. What is the marginal propensity to consume (MPC), the marginal propensity to save (MPS), and the multiplier?

a) MPC: 0.8, MPS: 0.2, Multiplier: 5

b) MPC: 0.2, MPS: 0.8, Multiplier: 5

c) MPC: 0.8, MPS: 0.2, Multiplier: 1

d) MPC: 0.2, MPS: 0.8, Multiplier: 1

Answer 1

The marginal propensity to consume (MPC) is 0.8, the marginal propensity to save (MPS) is 0.2, and the multiplier is 5.

Step-by-step explanation:

The marginal propensity to consume (MPC) is the fraction of an additional dollar of income that is spent on consumption. In this case, the MPC is given as 0.8, meaning that for every additional dollar of income, 0.8 is spent on consumption.

The marginal propensity to save (MPS) is the fraction of an additional dollar of income that is saved. MPS is calculated by subtracting MPC from 1. In this case, MPS is 0.2, as 1 - 0.8 = 0.2.

The multiplier indicates how much the overall income will change in response to a change in spending. The multiplier can be calculated as 1 divided by the marginal propensity to save or 1 divided by the MPS. In this case, the multiplier is 1/0.2 = 5.