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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

Suppose a handbill publisher can buy a new duplicating machine for \(500, and the duplicator has a 1-year life. The machine is expected to contribute \)550 to the year's net revenue. What is the expected rate of return? If the real interest rate at which funds can be borrowed to purchase the machine is 8 percent, will the publisher choose to invest in the machine? Will it invest in the machine if the real interest rate is 9 percent? If it is 11 percent?

How is it possible for investment spending to increase even in a period in which the real interest rate rises?

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

Use your completed table for problem 1 to solve this problem. Suppose the wealth effect is such that \(10 changes in wealth produce \)1 changes in consumption at each income level. If real estate prices tumble such that wealth declines by \(80, what will be the new level of consumption and saving at the \)340 billion level of disposable income? The new level of saving?

Level of Output and Income (GDP = DI)
Consumption
Saving
APC
APS
MPC
MPS
\(240
\)244
-$4
1.016
-0.016
0.8
0.2
2602600100.8
0.2
28027640.985
0.014
0.8
0.2
30029280.9730.0260.8
0.2
320308120.962
0.037
0.8
0.2
340324160.9520.0470.8
0.2
360340200.944
0.055
0.8
0.2
380356240.9360.0630.8
0.2
400372280.930.070.80.2

Why is investment spending unstable?
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