If disposable income is $900 billion when the average propensity to consume is 0.9, it can be concluded that:
A) The marginal propensity to consume is also 0.9
B) The marginal propensity to save is 0.1
C) Consumption is $900 billion
D) Saving is $90 billion

Question

Quizplus · Accepted Answer

The average propensity to consume (APC) is the fraction of total disposable income that is spent on consumption. Therefore, if disposable income is $900 billion and APC is 0.9, consumption is $810 billion (i.e. $900 x 0.9).

The marginal propensity to consume (MPC) is the fraction of a change in income that is consumed. We cannot determine the MPC from the given information, so option A is incorrect.

The marginal propensity to save (MPS) is the fraction of a change in income that is saved. Since APC + MPS = 1, we can calculate that MPS is 0.1 (i.e. 1 - 0.9), so option B is incorrect.

Therefore, the correct answer is option D, which states that saving is $90 billion (i.e. $900 x 0.1).

If Disposable Income Is $900 Billion When the Average Propensity