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Chapter 10: Q3. (page 214)

If the MPS rises, then the MPC will

  1. fall.

  2. rise.

  3. stay the same.

Short Answer

Expert verified

Option (a): fall

Step by step solution

01

Meaning of MPS and MPC

Marginal propensity to save (MPS) is the tendency of an individual (or the economy) to save out of total income, given by the following formula:

MPS=鈻�Savings鈻�Income

Marginal propensity to consume (MPC) is the tendency of an individual (or the economy) to consume out of their total income (or national income), given by the following formula:

MPC=鈻�Consumption鈻�Income

02

Explanation for the correct option

As income is divided between consumption expenditure and saving, the relation between MPC and MPS is shown below:

Y=C+S鈻�Y=鈻�C+鈻�SDividingbychangeinicome鈻�Y鈻�Y=鈻�C鈻�Y+鈻�S鈻�Y1=MPC+MPSThus,MPC=1-MPS

Therefore, if MPS rises, MPC will fall.

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Most popular questions from this chapter

Why will a reduction in the real interest rate increase investment spending, other things equal?

Assume there are no investment projects in the economy that yield an expected rate of return of 25 percent or more. But suppose there are \(10 billion of investment projects yielding expected returns of between 20 and 25 percent; another \)10 billion yielding between 15 and 20 percent; another $10 billion between 10 and 15 percent; and so forth. Cumulate these data and present them graphically, putting the expected rate of return (and the real interest rate) on the vertical axis and the amount of investment on the horizontal axis. What will be the equilibrium level of aggregate investment if the real interest rate is (a) 15 percent, (b) 10 percent, and (c) 5 percent?

Precisely how do the MPC and the APC differ? How does the MPC differ from the MPS? Why must the sum of the MPC and the MPS equal 1?

Suppose that an initial \(10 billion increase in investment spending expands GDP by \)10 billion in the first round of the multiplier process. If GDP and consumption both rise by \(6 billion in the second round of the process, what is the MPC in this economy? What is the size of the multiplier? If, instead, GDP and consumption both rose by \)8 billion in the second round, what would have been the size of the multiplier?

Why is investment spending unstable?
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