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August 21, 2014

Homework Help: Macroeconomics

Posted by hadi on Wednesday, September 20, 2006 at 5:50pm.

Suppose the marginal propensity to consume is 0.75. What does this mean? What do we know about the marginal propensity to save? What do we know about the average propensity to consume?


The marginal propensity to consume (MPS) the percent of an additional amount of income that would be spent on consumption (by a person or a group of people). Whatever the person doesnt spend, is by definition, savings; MPS=(1-MPC). So, with MPC=.75, if income rose by, say, $100 then consumption would rise by $75, savings by $25.

Current statistics show that current savings rates are quite low, relative to previous generations.

The Average propensity to consume APC is simply (total consumption)/(total income)

In general, the MPC is a "statistic" regarding the marginal income. You should not generally infer information about the APC based solely on the MPC. That said, IF the MPC is constant across all income classes, then the MPC=APC.

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