Question

Suppose savings in $1,400 when income is $10,000 and the MPC equals 0.8. When income increases to $12,000 savings is?

Answer 1

MPC is given by change in consumption/change in income

Mpc= 0.8 and income increases by $ 2000 then

0.8 = ∆C/2000

∆C= $ 1600. So consumption increases by $1600 when income increases by $2000

MPC = 1-MPS

So MPS = 0.2

When income increases by$ 2000, the savings would increase by

Mps = change in savings/ change in income

0.2 = ∆ S/ 2000

∆S = 2000*0.2=$ 400

So savings change by $400 .

Hence savings increase from $1400 to $1800 when income increases by $2000.

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