Chapter 18: Problem 2

The APS is defined as the increase in the saving per unit of increase in the income.

Short Answer

Expert verified

Question: Calculate the average propensity to save (APS) when the initial income is $5,000 with a saving of $800, and the final income is $7,000 with a saving of $1,500. Answer: To calculate the APS, follow the steps outlined in the solution: Step 1: Define the given values. I1 = $5,000 (initial income) S1 = $800 (initial saving) I2 = $7,000 (final income) S2 = $1,500 (final saving) Step 2: Calculate the increase in income. Increase in Income = I2 - I1 Increase in Income = $7,000 - $5,000 Increase in Income = $2,000 Step 3: Calculate the increase in saving. Increase in Saving = S2 - S1 Increase in Saving = $1,500 - $800 Increase in Saving = $700 Step 4: Calculate the APS. APS = (Increase in Saving) / (Increase in Income) APS = $700 / $2,000 APS = 0.35 The average propensity to save (APS) is 0.35, meaning that for each dollar increase in income, the saving increases by 35 cents.

Step by step solution

Define the given values

Let's assign letters to the given values: initial income (I1), initial saving (S1), final income (I2), and final saving (S2). We will later replace these letters with the actual values when calculating the APS.

Calculate the increase in income

To calculate the increase in income, subtract the initial income (I1) from the final income (I2). Use the following formula: Increase in Income = I2 - I1

Calculate the increase in saving

To calculate the increase in saving, subtract the initial saving (S1) from the final saving (S2). Use the following formula: Increase in Saving = S2 - S1

Calculate the APS

Divide the increase in saving by the increase in income to find the APS. Use the following formula: APS = (Increase in Saving) / (Increase in Income) By following these steps, the APS can be calculated, which represents the increase in saving per unit of increase in income.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Marginal Propensity to Save

When individuals receive additional income, their spending and saving habits tend to change. The marginal propensity to save (MPS) is a key concept in economics that measures the proportion of each additional dollar of income that is saved rather than spent on consumption. It's a reflection of people's tendency to save and provides insight into how an economy might respond to changes in income levels.

To calculate MPS, we apply the formula: $ MPS = \frac{\Delta Savings}{\Delta Income} $, where $ \Delta Savings $ represents the change in savings and $ \Delta Income $ is the change in income. If an individual's income increases by $100 and they save an additional $25, then their MPS is 0.25. Understanding MPS is crucial because it is used to predict overall savings levels in the economy and helps in assessing the effectiveness of fiscal policies.

Income and Saving Relationship

The relationship between income and saving is fundamental in understanding consumer behavior. Generally, as income increases, people save more both in absolute terms and as a percentage of their income. The average propensity to save (APS) is a related concept that looks at the portion of total income that is saved over a certain period. It's calculated by dividing total savings by total income over that period.

This ratio can fluctuate with income levels; higher income ordinarily leads to a higher APS since basic consumption needs are already met, and additional income is more likely to go into savings. The relationship also informs us how an economy might react to changes in personal incomes, which could affect investment levels and economic growth.

Economic Saving Formulas

Economic saving formulas are essential tools for analyzing consumer behavior and forecasting economic trends. One of the most important formulas is the APS calculation. The APS informs us about the overall saving habits of individuals or households relative to their total income. To compute the APS, we use the following formula: $ APS = \frac{Total Savings}{Total Income} $.

These savings formulas become practical in personal finance as well. For example, retirement planning often involves long-term saving strategies where understanding one's APS and MPS helps in creating more accurate and sustainable plans. In macroeconomics, these formulas lay the groundwork for policies aiming to stimulate or stabilize the economy. Policymakers analyze the trends indicated by APS and MPS to design interventions that aim to optimize economic outcomes.