Alexandra's Marginal Propensity to Consume is 0.80. When her income increases, she raises her savings by $80. By how much did her disposable income increase?
Select one:
a. By $400
b. By $500
c. By $540
d. By $600
e. By $800
Ans. a. By $400
MPC= 0.80 and an increase in saving = $80
As we know that MPC + MPS =1
0.80 + MPS = 1
MPS = 1 - 0.80
MPS = 0.20
and MPS = change in savings/ change in disposable income
0.20 = $80/ change in disposable income
change in disposable income = $80/0.20
change in disposable income = $400
Hence, Alexandra's disposable income increases by $400.
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