Question

Suppose that disposable income, consumption, and saving in some country are $400 billion, $350 billion, and $50 billion, respectively. Next, assume that disposable income increases by $40 billion, consumption rises by $28 billion, and saving goes up by $12 billion.

a. What is the economy's MPC?
what is the MPS
b. APC before?
c. APC after?

Answer 1

A. MPC = 0.7 ; MPS = 0.3

B. APC before = 0.875

C. APC after = 0.859

Step-by-step explanation:

Given that

Disposable income = 400 billion

Consumption = 350 billion

Savings = 50 billion

Change in consumption = 28 billion

Change in disposable income = 40 billion

Change in savings = 12 billion

Recall that,

a. MPC = change in consumption ÷ change in income

MPC = 28/40

MPC = 0.7

MPS = change in savings ÷ change in income

MPS = 12/40

MPS = 0.3

Recall again that

APC = Consumption ÷ Savings

b. Before increase

APC = 350 ÷ 400

= 0.875

c. After increase

Consumption = 350 + 28 = 378

Disposable income = 400 + 40 = 440

APC = 378 ÷ 440

APC = 0.859