Following is consumption schedules for three private closed economies.DI signifies disposable income and C represents consumption expenditures.All figures are in billions of dollars.

-Refer to the above data.Suppose that consumption increased by $2 billion at each level of DI in each of the three countries.We can conclude that the:
A) marginal propensity to consume will remain unchanged in each of the three countries.
B) marginal propensity to consume will decline in each of the three countries.
C) average propensity to save will fall at each level of DI in each of the three countries.
D) marginal propensity to save will rise in each of the three countries.

Question

Following is consumption schedules for three private closed economies.DI signifies disposable income and C represents consumption expenditures.All figures are in billions of dollars.
 
-Refer to the above data.Suppose that consumption increased by $2 billion at each level of DI in each of the three countries.We can conclude that the:
A) marginal propensity to consume will remain unchanged in each of the three countries. 
B) marginal propensity to consume will decline in each of the three countries. 
C) average propensity to save will fall at each level of DI in each of the three countries. 
D) marginal propensity to save will rise in each of the three countries.

Quizplus · Accepted Answer

If consumption increases by $2 billion at each level of DI in each of the three countries, then the slope of the consumption schedule will become steeper. However, this does not necessarily mean that the marginal propensity to consume (MPC) will change.

The MPC is defined as the change in consumption divided by the change in disposable income. Since consumption is increasing by the same amount at each level of income, the ratio of the change in consumption to the change in income (i.e. the MPC) will remain constant. Therefore, we can conclude that the MPC will remain unchanged in each of the three countries.

Choice (B) is incorrect because there is no reason to believe that the MPC will decline as consumption increases.

Choice (C) is also incorrect because the increase in consumption will cause the average propensity to save (APS) to decrease, not fall. The APS is the ratio of saving to disposable income, and if consumption is increasing while income remains constant, then saving must be decreasing.

Choice (D) is incorrect because if the MPC remains constant, then the marginal propensity to save (MPS) must also remain constant, since the MPC and MPS always sum to 1.

Following Is Consumption Schedules for Three Private Closed Economies