Question

6. Suppose an economy currently earns $6,000 billion and spend $4.680 billion. If their income increases to $6,500 billion, they will spend $4,980 billion. (5 pts.de a. Calculate the average propensity to consume when the income is $6,000 billion. Į I I Į Į Į b. Calculate the average propensity to save when the income is $6.000 billion. Į Į Į Į Į ł c. Calculate the marginal propensity to consume when income increases from $6,000 billion to $6,500 billion. d. Calculate the marginal propensity to save when income increases from $6,000 billion to $6,500 billion. Į 2 Į Į Į Į e. Calculate the spending multiplier.

Answer 1

Question 6

(a)

When the income is $6,000 billion, the consumption is $4,680 billion.

Calculate the average propensity to consume -

APC = Consumption/Income

APC = $4,680 billion/$6,000 billion

APC = 0.78

The average propensity to consume is 0.78

(b)

Calculate the average propensity to save -

APS = 1 - APC

APS = 1 - 0.78

APS = 0.22

Thus,

The average propensity to save is 0.22

(c)

When income increases from $6,000 billion to $6,500 billion, the consumption increases from $4,680 billion to $4,980 billion.

Increase in income = $500 billion

Increase in consumption = $300 billion

Calculate the marginal propensity to consume -

MPC = Increase in consumption/Increase in income

MPC = $300 billion/$500 billion = 0.6

The marginal propensity to consume is 0.6

(d)

Calculate the marginal propensity to save -

MPS = 1 - MPC

MPS = 1 - 0.6 = 0.4

Thus,

The marginal propensity to save is 0.4

(e)

Calculate the spending multiplier -

Spending multiplier = 1/(1-MPC) = 1/(1 - 0.6) = 1/0.4 = 2.5

Thus,

The spending multiplier is 2.5