Suppose that disposable income, consumption, and saving in some country are $800 billion, $700 billion, and $100 billion, respectively. Next, assume that disposable income increases by $80 billion, consumption rises by $64 billion, and saving goes up by $16 billion. What is the economys MPC? Its MPS?

MPC = 0.8 ; MPS = 0.2

Explanation:

Given the following ;

Increase in disposable income = $80 billion

Increase in consumption = $64 billion

Increase in savings = $16 billion

The disposable income of a country can be regarded as the that part of a country's or an individual's income which isn't subject to any sort of deduction such tax which one can decide to save, spend on consumption or investment.

Marginal Propensity to Consume(MPC) = ratio of the tendency of an economy or individual to spend on consumption with change in value or amount of disposable income

MPC = Increase in consumption /increase in disposable income

MPC = $64 billion / $80 billion = 0.8

2. Marginal Propensity to Save(MPS) = ratio of the tendency of an economy or individual to save its income with change in value or amount of disposable income

MPS = Increase in saving /increase in disposable income

MPS = $16 billion / $80 billion = 0.2

Summing up both MPS and MPC will always give a value of 1, As disposable income are always placed in either of the two categories : Consumption or Saving.

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