Question

a. Suppose that, if their income rises by $100, all households in Normalia raise their spending by $90. Instructions: Round your answers to one decimal place. The MPC in Normalia is: MPS in Normalia is: b. Suppose that the MPC in South Pangea is 0.7. Instructions: Enter your answer as a whole number. If a South Pangean household earns an extra $100, by how much will they increase their spending?

Answer 1

In Normalia, the MPC is 0.9 and the MPS is 0.1. In South Pangea, with an MPC of 0.7, a household earning an extra $100 will increase spending by $70.

Step-by-step explanation:

In the scenario provided for Normalia, if household income increases by $100 and the spending rises by $90, the Marginal Propensity to Consume (MPC) in Normalia is calculated as the change in consumption divided by the change in income, which equals $90/$100 or 0.9. In contrast, the Marginal Propensity to Save (MPS) is 1 minus the MPC, which in this case is 1 - 0.9, resulting in 0.1 or 10%.

For South Pangea, with an MPC of 0.7, if a household earns an extra $100, they will increase their spending by 70% of the additional income. Therefore, the spending increase is calculated by multiplying the extra income ($100) by the MPC (0.7), yielding a $70 increase in spending.

Answer 2

The MPC (Marginal Propensity to Consume) in Normalia = 0.9

The MPS (Marginal Propensity to Save) in Normalia = 0.1

A South Pangean household will increase their spending by $70

Step-by-step explanation:

In Normalia if income increases by $100 and all households increase their spending by $90 that would mean for every $100 they earn they will spend (consume) $90 = 0.9. Which means they have $10 left so they save 10% leaving their MPS to be 0.1. For the households in South Pangea if they have a MPC of 0.7 that means if they have $100 they will spend $70.