Question

Refer to the information in the table that follows to answer the question that follows:

The Agrinimia Macroeconomy

Output (Income) Y	Net Taxes T	Consumption Spending (C = 100 + 0.9Yd)	Savings S	Planned Investment I	Government Spending G
2400	100	2170	130	130	200
2800	100	2530	170	130	200
3000	100	2710	190	130	200
3200	100	2890	210	130	200
3400	100	3070	230	130	200
3600	100	3250	250	130	200
3800	100	3430	270	130	200

Calculate the marginal propensity to save (MPS)?

Select one:

a. 0.2

b. Cannot be determined from the information available

c. 0.8

d. 0.1

Answer 1

Answer: Marginal propensity to save is 0.1

Option d) 0.1

The marginal propensity to save is the general tendency of the economy to save a proportion of its income.

MPS is the ratio of change in savings over the change in income.

From the given table, we can calculate the marginal propensity to save:

Therefore from the above table, we can see that the ratio of change in savings over the change in income is 0.1. Therefore the MPS or marginal propensity to save is 0.1

Marginal Propensity to Save = 0.1

The other method to find the MPS:

As the consumption function is given as:

C = 100 + 0.9Yd

where normally consumption functions are: C = a+MPC(Y)

therefore here Marginal propensity to consume is 0.9.

MPC = 0.9

As the sum of Marginal propensity to consume (MPC) and marginal propensity to save (MPS) is equal to 1.

As MPC = 0.9, therefore MPS is:

Therefore we can verify from this that the Marginal propensity to Save or MPS is 0.1.

Therefore Option (d) is correct, that is MPS = 0.1