Question

Consumption equals $32,000 when disposable income equals $40,000. Consumption increases to $38,000 when disposable income increases to $50,000. What is the marginal propensity to consume? The marginal propensity to save? What is the value of the spending multiplier?

Answer 1

The marginal propensity to consume (MPC) is 0.6 or 60%, the marginal propensity to save (MPS) is 0.4 or 40%, and the spending multiplier (SM) is 2.5.

Step-by-step explanation:

To calculate the marginal propensity to consume (MPC), we can use the formula:

MPC = Change in Consumption / Change in Disposable Income

Using the given information, the change in consumption is $38,000 - $32,000 = $6,000, and the change in disposable income is $50,000 - $40,000 = $10,000. So, the MPC is $6,000 / $10,000 = 0.6 (or 60%).

The marginal propensity to save (MPS) can be calculated by subtracting the MPC from 1. So, the MPS is 1 - 0.6 = 0.4 (or 40%).

The spending multiplier (SM) can be calculated using the formula:

SM = 1 / MPS = 1 / 0.4 = 2.5