Alexandra's Marginal Propensity to Consume is 0.80. When her income increases, she raises her savings by...
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
Homework Answers
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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