Question

If the consumption function is given by C = 150 + 0.85Y and Y increases by 1 unit, then savings:

Select one: a. increases by 0.85 units. b. increases by 0.15 units. c. decreases by 0.15 units. d. decreases by 0.85 units.

Answer 1

As we can see, from the consumption function, the marginal propensity to consume is 0.85 and the marginal propensity to save is equal to 1 minus marginal propensity to consume, so marginal propensity to save is 0.15 that implies that out of every unit increase in the income 0.15 units will be saved and 0.85 units will be spent on the consumption of goods and services. Therefore, we can say that if Y increases by one unit then saving increases by 0.15 units, so the right answer is option B.