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MPC and MPS

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Explain the relationship between the marginal propensity to consume and the marginal propensity to save. How do these two components affect GDP?

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Solution Summary

This solution defines Marginal Propensity to Consume (MPC) and Marginal Propensity to Save (MPS) and explains how they affect Gross Domestic Product (GDP) because of the multiplier effect.

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The portion of income that each person saves is called the Marginal Propensity to Save (MPS). The portion that each person spends is called the Marginal Propensity to Consume (MPC). MPS = 1 - MPC, so if a person wants to save 10% of his money, his MPS is 0.1 and his MPC is 0.9.
When a consumer spends money, the money changes hands and a ...

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