If the average propensity to consume is initially 0.8, the marginal propensity to consume is 0.75, and real disposable income increases by $1000, the value of saving
A) increases by $200.
B) increases by $250.
C) decreases by $250.
D) decreases by $200.

Question

Quizplus · Accepted Answer

The marginal propensity to consume (MPC) is 0.75, which means that for every additional dollar of income, consumption increases by 75 cents. Therefore, if income increases by $1000, consumption increases by $750 (0.75 * $1000). Since the total increase in income is $1000, and $750 of it is consumed, the remaining $250 ($1000 - $750) is saved. Thus, saving increases by $250.

If the Average Propensity to Consume Is Initially 0