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MPC (Marginal Propensity to Consume)

(See attached file for full problem description with diagram)

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11. (MPC and MPS) If consumption increases by \$12 billion when real disposable income increases by \$15 billion, what is the value of the MPC? What is the relationship between the MPC and the MPS? If the MPC rises, what must happen to the MPS? How is the MPC related to the consumption function? How is the MPS related to the saving function?

13. (Investment Spending) Review Exhibit 7 in this chapter. If the operators of the golf course revised their revenue estimates so that each cart is expected to earn \$100 less, how many carts would they buy at an interest rate of 8 percent? How many would they buy if the interest rate is 3 percent?
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Solution Preview

11. First of all, the definition of MPC (Marginal Propensity to Consume) is the relationship between disposable income changes and consumption changes. Specifically, it's the ratio between those variables. Therefore, the formula that must be used to calculate MPC is:

Change in Consumption
MPC = ----------------------------
Change in Income

So in this case, since consumption increases by \$12 million when income increases by \$15 million, then MPC = 12/15 = 4/5 = 0.8

The relationship between MPC and MPS (Marginal Propensity to Save) is a very simple. Income is either used for consumption or saving. Therefore,

Income = Consumption + Savings
Saving = Income - Consumption (*)

Now:

Change in Savings
MPS = -------------------------
Change in Income

and using the fact (*):

(Change in Income) - (Change in ...

Solution Summary

MPC (Marginal Propensity to Consume) is depicted.

\$2.19