Suppose real GDP increases from $13 trillion to $14 trillion. As a result, consumption expenditure increases from $13 trillion to $13.75 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

The MPS (marginal propensity to save) is the proportion of additional income that is saved rather than consumed.

We can calculate the MPS using the information given:

Increase in GDP = $1 trillion ($14 trillion - $13 trillion)
Increase in consumption = $0.75 trillion ($13.75 trillion - $13 trillion)

The MPS can be calculated as:

MPS = (change in saving) / (change in income)

Since we know that income increased by $1 trillion and consumption increased by $0.75 trillion, we can use the income and consumption changes to estimate the change in saving:

Change in saving = $1 trillion - $0.75 trillion = $0.25 trillion

Using this information, we can calculate the MPS:

MPS = $0.25 trillion / $1 trillion = 0.25

Therefore, the answer is A) 0.25.

Suppose Real GDP Increases from $13 Trillion to $14 Trillion