In a simple, closed economy (no government or foreign sector), if the marginal propensity to save is 0.2, the marginal propensity to consume must be:

Question

Quizplus · Accepted Answer

In a closed economy, income is either consumed or saved. Therefore, the sum of marginal propensity to consume (MPC) and marginal propensity to save (MPS) should equal 1. Since the MPS is 0.2, the MPC must be 0.8 (1 - 0.2 = 0.8). Therefore, the answer is B.

In a Simple, Closed Economy (No Government or Foreign Sector)