Question

Consider a hypothetical economy in which the marginal propensity to consume (MPC) is 0.84. Suppose that in Year 1, disposable income in the economy was $412 billion and consumption was $368 billion. Suppose further that in Year 2, disposable income is $540 billion. Calculate the level of saving in Year 2. Show your work.

Answer 1

$64,48 billion

Step-by-step explanation:

marginal propensity ( MPC ) = 0.84 i.e ratio of disposable income to consumption is $1 to 84 cent

YEAR 1 disposable income = $412 billion

year 1 consumption = $368 billion

year 2 disposable income = $540 billion

calculate the level of saving in year 2

from given data

consumption = Co + 0.84 * 412

368 = Co + 346.08

therefore Co = 21.92

therefore for year 2

Consumption = Co + 0.84 * 540

= 21.92 + 453.6 = $475.52

hence savings level = disposable - consumption = 540 - 475.52 = $64,48 billion