If the average propensity to consume is 1.0, the marginal propensity to consume is 0.8, and real disposable income increases by $100, the additional saving is
A)$0.
B)$20.
C)$80.
D)$100.

Question

Quizplus · Accepted Answer

The marginal propensity to consume (MPC) is the increase in consumer spending resulting from an increase in disposable income. In this case, the MPC is 0.8, which means that for every additional dollar of disposable income, consumers will spend 80 cents and save 20 cents.

The average propensity to consume (APC) is the ratio of total consumption to total income. An APC of 1.0 indicates that all income is consumed, leaving no room for saving.

Given an increase in real disposable income of $100 and an APC of 1.0, consumers will spend all of the additional income, which amounts to $100. However, since the MPC is 0.8, they will save 20% of that amount, or $20.

Therefore, the correct answer is B) $20.

If the Average Propensity to Consume Is 1