Question

Suppose that disposable income, consumption, and saving in some country are \(200 billion, \)150 billion, and \(50 billion, respectively. Next, assume that disposable income increases by \)20 billion, consumption rises by \(18 billion, and saving goes up by \)2 billion. What is the economy’s MPC? Its MPS? What was the APC before the increase in disposable income? After the increase?

Short answer

The economy’s MPC is 0.9.

The MPS of the economy is 0.1

The APC before an increase in disposable income was 0.75.

The APC after an increase in disposable income is 0.763.

Step-by-step solution

Calculation for MPC

Given: Disposable income (Y_d) is $200 billion, consumption (C) is $150 billion, and saving (S) is $50 billion. The change in disposable income (𝛥Y_d) is $20 billion, the change in consumption (𝛥C) is $18 billion, and the change in saving (𝛥C) is $2 billion.

Thus, MPC is calculated using the above values in the following manner:

MPC =𝛥C/𝛥Y_d

MPC = 18/20

MPC = 0.9

Hence, the economy’s MPC is 0.9.

Calculation for MPS

MPS is calculated as follows:

MPS = 1 – MPC

MPS = 1 – 0.9

MPS = 0.1

Thus, the economy’s MPS is 0.1.

Calculation for APC before a change in disposable income and consumption

APC before the change is calculated in the following manner:

APC = Total consumption/Total disposable income

APC = 150/200

APC = 0.75

Therefore, the economy’s APC before an increase in disposable income and consumption is 0.75.

Calculation for APC after a change in income and consumption

Total consumption after increase of $18 billion is $168 billion (= 150 + 18).

Total disposable income after increase of $20 billion is $220 billion (= 200 + 20).

APC after the change is calculated in the following manner:

APC = 168/220

APC = 0.763

Thus, the economy’s APC has slightly increased after the increase in disposable income and consumption, 0.763.