Chapter 21: Problem 15

The marginal propensity to save is a. the change in saving induced by a change in consumption. b. (change in \(S\) ) / (change in \(Y\) ). c. \(1-M P C / M P C\) d. (change in \(Y-b Y\) ) / (change in \(Y\) ). e. \(1-M P C\)

Short Answer

Expert verified

The marginal propensity to save is correcty defined by both Option b: (change in \(S\) ) / (change in \(Y\) ) and Option e: \(1-M P C\). These options express the relationship between change in savings and change in income, and between the difference of 1 and the marginal propensity to consume respectively.

Step by step solution

Option a: Change in saving induced by a change in consumption

This option talks about the change in saving due to a change in consumption. However, it does not explicitly mention the additional income, making this not a precise definition of MPS.

Option b: (change in \(S\) ) / (change in \(Y\) )

Here, \(S\) stands for saving and \(Y\) for income. This option directly shows the relationship between the change in saving and change in income which is the definition of MPS. So, this option seems to be a correct one.

Option c: \(1-M P C / M P C\)

In this option, \(M P C\) refers to the marginal propensity to consume. The correct relationship should be \(MPS = 1 - MPC\). Since the option does not represent the correct relationship, this isn't the right definition of MPS.

Option d: (change in \(Y-b Y\) ) / (change in \(Y\) )

This option involves some additional terms (\(Y\) and \(b\)), and although it shows the change in some quantity over the change in income, it does not directly explain the relationship between the change in saving and change in income. Hence, this isn't the correct definition of MPS.

Option e: \(1-M P C\)

This option shows the relationship between MPC and MPS, with MPS being equal to the difference between 1 and MPC. This is true for a simplified two-sector model in an economy, as people either consume or save their additional income. Thus, this option also seems to be a correct definition of MPS. In conclusion, both Options b and e correctly define the Marginal Propensity to Save: - Option b: (change in \(S\) ) / (change in \(Y\) ) - Option e: \(1-M P C\)