Suppose consumption is $10,000 when income is $9,000 and the marginal propensity to save equals 0.2. When income increases to $9,500, consumption will be:

Question

Quizplus · Accepted Answer

The marginal propensity to save (MPS) is 0.2, so the marginal propensity to consume (MPC) is 0.8 (since MPC + MPS = 1). With an income increase of $500, consumption increases by 0.8 * $500 = $400. Thus, new consumption is $10,000 + $400 = $10,400.

Suppose Consumption Is $10,000 When Income Is $9,000 and the Marginal