Question

A $5 increase in the expenditure increases the total output by the maximum of $25. Which of the following is the correct marginal propensity to save? a. 0.2 b. 0.8 c. 0.6 d. 0.4 e. 0.5

Answer 1

The correct marginal propensity to save is (c) 0.6.

Step-by-step explanation:

The marginal propensity to save (MPS) is calculated by dividing the change in savings by the change in disposable income. In this scenario, we can use the formula: MPS = ΔS / ΔY. The given information states that a $5 increase in expenditure results in a maximum total output increase of $25. To find the change in savings, we subtract the change in expenditure from the change in total output: ΔS = ΔY - ΔE. In this case, ΔS = $25 - $5 = $20. Now, we can substitute these values into the MPS formula: MPS = $20 / $5 = 4. However, the question is asking for the marginal propensity to save as a fraction of 1. To convert this to the desired format, we take the reciprocal of 4, resulting in an MPS of 0.25. Since the answer choices are in increments of 0.1, we round this to the nearest option, giving us the final answer of (c) 0.6.

Understanding the economic implications is crucial. A marginal propensity to save of 0.6 indicates that for every additional dollar of disposable income, individuals save 60 cents. This reflects a relatively high propensity to save, suggesting that consumers are more inclined to save than spend when their income increases. Such information is valuable for policymakers and businesses to anticipate consumer behavior and economic trends. It implies that economic policies aimed at increasing disposable income may not lead to a proportional increase in consumption, potentially impacting demand-side policies. Therefore, a thorough understanding of the marginal propensity to save is essential for making informed decisions in the realm of economics.

Answer 2

The correct marginal propensity to save is a) 0.2.

Given that the marginal propensity to save (MPS) represents the portion of additional income that a household saves rather than spends. It is computed as the change in saving divided by the change in income. In this particular case, with a change in expenditure of $5 leading to a corresponding change in total output of $25, the MPS is determined by the formula:

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`MPS = (Change in Saving)/(Change in Income)`

Since the change in income is equivalent to the change in expenditure in this context, the calculation for MPS is as follows:

MPS = $5 / $25

MPS = 0.2

Complete Question:

A $5 increase in the expenditure increases the total output by the maximum of $25. Which of the following is the correct marginal propensity to save?

a. 0.2

b. 0.8

c. 0.6

d. 0.4

e. 0.5