If the marginal propensity to save is 0.4 and disposable income decreases from $2,000 to $1,000, saving will
A) decrease by $400.
B) increase by $400.
C) decrease by $80.
D) increase by $80

Question

Quizplus · Accepted Answer

The marginal propensity to save (MPS) is 0.4, which means that for every $1 decrease in disposable income, saving will decrease by $0.40. Therefore, with a decrease in disposable income of $1,000 (from $2,000 to $1,000), saving will decrease by 0.4 x $1,000 = $400. Thus, the correct answer is A - decrease by $400.

If the Marginal Propensity to Save Is 0