Question

If consumption increases by $12 billion when real disposable income increases by 15 billion, what is the value of the MPC? What is the relationship between the MPC and the MPS?If the MPC increases, what must happen to the MPS? How is the MPC related to the consumption function? How is the MPS related to the saving function?

Answer 1

Since the consumption function can be expressed as

C=a+bYd

C is consumption, a is autonomous consumption which does not depends on income, b is marginal propensity to consume and Yd is disposable income.

marginal propensity to consume (MPC) is=0.75

MPC=change in consumption / change in disposable income

=12/15

=0.8

MPS=1-MPC

=1-0.8

=0.2

2.

MPC+MPS=1

3.

When MPC increases, then MPS must decrease.

C=a+bYd

MPC and consumption are positively related.

Saving function

S= -a+sYd

MPS and saving are positively related.