If the marginal propensity to save is 0.4,then a $2 million increase in disposable income will
A)increase consumption by $5 million.
B)increase consumption by $1.2 million.
C)decrease consumption by $5 million.
D)decrease consumption by $1.2 million.

Question

Quizplus · Accepted Answer

The marginal propensity to save of 0.4 indicates that for every $1 increase in disposable income, $0.40 will be saved and $0.60 will be spent (consumed). Therefore, a $2 million increase in disposable income will increase consumption by 0.60 x $2 million = $1.2 million.

If the Marginal Propensity to Save Is 0