Question

What is the level of saving if: a. Disposable income is \(\$ 500\) and consumption is \(\$ 450\) ? b. Disposable income is \(\$ 1,200\) and the \(A P S\) is 9 ? c. The \(M P C\) cquals .9, disposable income rises from \(\$ 800\) to \(\$ 900\), and saving is originally \(\$ 120\) when income equals \(\$ 800\) ?

Short answer

a) Disposable income is $500 and consumption is $450. b) Disposable income is $1,200 and the Average Propensity to Save (APS) is 9%. c) Marginal Propensity to Consume (MPC) is 0.9, disposable income rises from $800 to $900, and saving is $120 when income equals $800. Answer: a) Saving = $50 b) Saving = $108 c) Saving = $30

Step-by-step solution

Scenario a

We are given disposable income as \(\$ 500\) and consumption as \(\$ 450\). So, to find the level of saving, we simply subtract consumption from disposable income: Saving = Disposable income - Consumption Saving = $500 - 450 Saving = $50

Scenario b

We are given disposable income as \(\$ 1,200\) and the APS as 9%. To find the level of saving, we multiply the disposable income by the APS: Saving = APS * Disposable income Saving = 0.09 * 1200 Saving = $108

Scenario c

We are given the MPC as 0.9, the disposable income rises from \(\$ 800\) to \(\$ 900\), and saving is originally \(\$ 120\) when income equals \(\$ 800\). First, we will find the change in income: Change in income = Final income - Initial income Change in income = $900 - 800 Change in income = $100 Next, we will find the change in consumption by multiplying the change in income by the MPC: Change in consumption = MPC * Change in income Change in consumption = 0.9 * 100 Change in consumption = $90 Finally, we will find the new saving level by adding the change in consumption to the initial saving level (as saving and consumption are inversely related): New saving level = Initial saving level - Change in consumption New saving level = $120 - 90 New saving level = $30