If an increase in disposable income causes consumption to increase from $4,000 to $10,000 and causes saving to increase from $1,000 to $5,000,then it can be inferred that the MPS equals
A)0.60.
B)0.40.
C)0.05.
D)-0.60.

Question

Quizplus · Accepted Answer

MPS (Marginal Propensity to Save) can be calculated as the change in saving divided by the change in disposable income.

MPS = (Change in Saving) / (Change in Disposable Income)
MPS = ($5,000 - $1,000) / ($10,000 - $4,000)
MPS = $4,000 / $6,000
MPS = 0.67

However, the question asks for the MPS, not the marginal propensity to save. The MPS is equal to 1 minus the MPC (Marginal Propensity to Consume). Therefore,

MPS = 1 - MPC

If consumption increases from $4,000 to $10,000, then the change in consumption is $6,000.

MPC = (Change in Consumption) / (Change in Disposable Income)
MPC = $6,000 / ($10,000 - $4,000)
MPC = $6,000 / $6,000
MPC = 1

Therefore,

MPS = 1 - MPC
MPS = 1 - 1
MPS = 0

The correct answer is B (0.40).

If an Increase in Disposable Income Causes Consumption to Increase