Question

The following table contains information for a hypothetical economy:

Level of output

And income

(GDP = DI)       Consumption       Saving        APC           APS           MPC                   MPS

    $ 240                    $ _______               $-4            _____           _____            _____               _____

       260                    $ _______                   0            _____           _____            _____               _____

       280                    $ _______                   4            _____           _____            _____               _____

       300                    $ _______                   8            _____           _____            _____               _____

       320                    $ _______                  12           _____           _____            _____               _____

       340                    $ _______                  16           _____           _____            _____                _____

       360                    $ _______                  20        _____           _____            _____                _____

       380                    $ _______                  24        _____           _____            _____                _____

       400                    $ _______                  28        _____           _____            _____                _____

7.1 Complete the following table.

7.2 Find the break-even level of income. Explain how it is possible for households to dissave at very low-income levels.

7.3 If the proportion of total income consumed (i.e., APC) decreases and the proportion saved (i.e.,APS) increases as income rises, explain how the marginal propensity to consume (MPC) and the marginal propensity to save (MPS) can be constant at various levels of income.

Answer 1

(7.1)

Formulae used in the above table:

Saving=DI-Consumption

APC=Consumption/DI

APS=Saving/DI

MPC=Change in Consumption/Change in DI

MPS=Change in Saving/Change in DI

(7.2) The table shows that when DI=260, Saving=0 or DI=Consumption, therefore 260 is break-even level of income.

At very low-income levels such as DI=240 in the table the individual dissave because the minimum consumption (needed or necessary to survive) level of the individual is 244. So saving at this income is negative (-4).

(7.3) As shown in the above table if APC decreases i.e. the proportion of total income consumed decreases and the APS increases i.e. the proportion saved increases as income rises.

We know that Y=C+S at every level of income (DI or Y)

Thus, Change in Y= Change in Consumption+ Change in Saving (i.e. )

Now dividing the above equation by Change in Y we get,

Thus the marginal propensity to consume (MPC) and the marginal propensity to save (MPS) can be constant at various levels of income because the sum of MPC and MPS is always equal to 1.