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Consider a hypothetical economy in which the marginal propensity to consume (MPC) is 0.50. That is, if disposable income increases by $1, consumption increases by 50¢. Suppose further that last year disposable income in the economy was $450 billion and consumption was $400 billion.
From the preceding data, you know that the level of saving in the economy last year was $_______ billion and the marginal propensity to save in this economy is_______ .
Suppose that this year, disposable income is projected to be $650 billion. Based on your analysis, you would expect consumption to be $______ billion and saving to be $______ billion.

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kaympoey08

Answer:

The level of saving =  $450 billion - $400 billion= $50 billion

Marginal propensity to save = 1- marginal propensity to consume (MPC)=0.5

Expected consumption

MPC=  change in Consumption/ change in income 200 billion * 0.5 = $100billion

Therefore consumption = 100 billion + 400 billion = $500 billion

Saving = $650 billion - $500 billion=  $ 150 billion

Explanation:

The level of saving in the economy last year was $50 billion and the marginal propensity to save in this economy is 0.5.

Based on your analysis, the expected consumption will be $500 billion and saving to be $150 billion.

Based on the information given, the level of saving will be:

=  $450 billion - $400 billion

= $50 billion

Marginal propensity to save will be:

= 1 - marginal propensity to consume (MPC)

= 1 - 0.5 = 0.5

The marginal propensity to consume will be:

= 200 billion × 0.5 = $100billion

Therefore consumption will then be:

= 100 billion + 400 billion

= $500 billion

Saving will be:

= $650 billion - $500 billion

= $150 billion

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