Suppose that personal income rises from $3000 to $4000 per month,and consumption rises from $2000 to $2600 per month.If taxes are 25 percent of income,what must marginal propensity to save be?

Question

Quizplus · Accepted Answer

The marginal propensity to save (MPS) is calculated as the change in savings divided by the change in income. First, calculate the change in income: $4000 - $3000 = $1000. Next, calculate the change in consumption: $2600 - $2000 = $600. The change in savings is the change in income minus the change in consumption: $1000 - $600 = $400. Therefore, MPS = $400 / $1000 = 0.40. However, since taxes are 25%, the disposable income change is $750 ($1000 - $250), and the MPS is $400 / $750 = 0.20.

Suppose That Personal Income Rises from $3000 to $4000 Per