Question

In a simple, closed economy (no government or foreign sector), disposable income increases from $2,000 to $3,000. If consumption increases from $1,500 to $2,100, the marginal propensity to save is: 0.40. $400. 0.80. $600.

Answer 1

The marginal propensity to save is 0.4

Step-by-step explanation:

The marginal propensity to save is 1 - marginal propensity to consume.

The marginal propensity to consume is the proportion of an increase in income that the consumers will spend from this increased income and the marginal propensity to save is the proportion of the increase in income that will be saved.

The marginal propensity to consume (MPC) = Change in consumption / change in income

The MPC = (2100 - 1500) / (3000 - 2000) = 0.6

Thus, the marginal propensity to save is 1 - 0.6 = 0.4