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Fact 11.1.1
In an economy, when disposable income increases from $400 billion to $500 billion, consumption expenditure increases from billion to $540 billion.
-Consider Fact 11.1.1.The marginal propensity to save is
A)0.75.
B)0.60.
C)0.80.
D)0.40.
E)0.25.

Question

Quizplus · Accepted Answer

The marginal propensity to save (MPS) is calculated as the change in saving divided by the change in disposable income. Here, the disposable income increases by $100 billion ($500 billion - $400 billion), and consumption expenditure increases by $40 billion ($540 billion - $500 billion), implying that saving increases by $60 billion ($100 billion - $40 billion). Therefore, MPS = $60 billion / $100 billion = 0.60. However, since the question asks for the MPS and the options seem to reflect a misunderstanding in calculation, the correct interpretation based on the provided options and the typical calculation of MPS would lead to recognizing an error in the explanation. Given the options, none directly match the calculated MPS of 0.60, suggesting a need to correct the explanation. The correct calculation for MPS, given the increase in income and consumption, should focus on the portion of income not spent, which is indeed $60 billion out of the $100 billion increase. However, the correct answer based on the options provided and aiming to match the expected process would be to identify the portion saved, which was mistakenly identified in the initial explanation. The correct MPS calculation should reflect the increase in savings relative to the increase in income, which was not directly matched by the options but intended to be identified through the correct process.

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