Question

If Carol's disposable income increases from $1,200 to $1,700 and her level of saving increases from minus $100 to a plus $100, her marginal propensity to

Mps = change in savings/change in y = s2-s1/y2-y1
=200/500 = 2/5= 4/10
MPC = 1-MPS = 1-2/5= 3/5_____________-

Answer 1

Carol's total consumption will increase by $300

Carol's marginal propensity to save (MPS) = ($100 + $100) / ($1,700 - $1,200) = $200 / $500 = 0.4 or 40%

So her marginal propensity to consume (MPC) = 1 - 0.4 = 0.6 or 60%

If Carol's disposable income increases by $500, then her consumption will increase by $300 (= 60% x $500).

The marginal propensity to consume (MPC) is the proportion of a change in income that is spent.