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Chapter 10: Q3. (page 214)

If the MPS rises, then the MPC will

  1. fall.

  2. rise.

  3. stay the same.

Short Answer

Expert verified

Option (a): fall

Step by step solution

01

Meaning of MPS and MPC

Marginal propensity to save (MPS) is the tendency of an individual (or the economy) to save out of total income, given by the following formula:

MPS=△Savings△Income

Marginal propensity to consume (MPC) is the tendency of an individual (or the economy) to consume out of their total income (or national income), given by the following formula:

MPC=△Consumption△Income

02

Explanation for the correct option

As income is divided between consumption expenditure and saving, the relation between MPC and MPS is shown below:

Y=C+S△Y=△C+△SDividingbychangeinicome△Y△Y=△C△Y+△S△Y1=MPC+MPSThus,MPC=1-MPS

Therefore, if MPS rises, MPC will fall.

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Most popular questions from this chapter

Why will a reduction in the real interest rate increase investment spending, other things equal?

Irving owns a chain of movie theaters. He is considering whether he should build a new theater downtown. The expected rate of return is 15 percent per year. He can borrow money at a 12 percent interest rate to finance the project. Should Irving proceed with this project?

  1. Yes

  2. No

Precisely how do the MPC and the APC differ? How does the MPC differ from the MPS? Why must the sum of the MPC and the MPS equal 1?

True or False. Real GDP is more volatile (variable) than gross investment.

In year 1, Adam earns \(1,000 and saves \)100. In year 2, Adam gets a \(500 raise so that he earns a total of \)1,500. Out of that \(1,500, he saves \)200. What is Adam’s MPC out of his $500 raise?

  1. 0.50

  2. 0.75

  3. 0.80

  4. 1.00
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