Suppose real GDP increases from $9 trillion to $10 trillion. As a result, consumption expenditure increases from $9 trillion to $9.75 trillion. This result implies the MPS equals
A) 0.25.
B) 0.75.
C) 0.
D) some amount that cannot be determined without more information.

Question

Quizplus · Accepted Answer

MPS (Marginal Propensity to Save) is the ratio of the change in savings to the change in income. We know that GDP has increased from $9 trillion to $10 trillion, and consumption expenditure has increased from $9 trillion to $9.75 trillion.

Therefore, the change in income (ΔY) = $10 trillion - $9 trillion = $1 trillion 
The change in consumption expenditure (ΔC) = $9.75 trillion - $9 trillion = $0.75 trillion

The MPS can be calculated as: 
MPS = ΔS/ΔY 
MPS = (ΔY - ΔC)/ΔY 
MPS = ($1 trillion - $0.75 trillion)/$1 trillion 
MPS = $0.25 trillion/$1 trillion 
MPS = 0.25

Therefore, the MPS equals 0.25. Answer choice A is correct.

Suppose Real GDP Increases from $9 Trillion to $10 Trillion