In a simple, closed economy (no government or foreign sector), disposable income increases from $2,000 to $3,000. If consumption increases from $1,500 to $2,100, the marginal propensity to save is:

Question

Quizplus · Accepted Answer

The formula for marginal propensity to save (MPS) is:

MPS = change in saving ÷ change in disposable income

Using the data provided:

Change in disposable income = $3,000 - $2,000 = $1,000 
Change in consumption = $2,100 - $1,500 = $600

To find the change in saving, we can use the formula:

Change in saving = Change in disposable income - Change in consumption

Change in saving = $1,000 - $600 = $400

Now we can calculate the MPS:

MPS = $400 ÷ $1,000 = 0.40

Therefore, the answer is D, 0.40.

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