Suppose a consumption function is given as C = $175 + 0.85YD. The marginal propensity to save is:
200.
0.15.
-0.15.
0.85.please explain how to do the problem please 🙂
4 Answers
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MPC=dC/dYD=0.85
MPS=1-MPC=1-0.85=0.15.The answer is B.
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You did not give say the thing you need find. You only gave the consumption function and the marginal propensity to save, but what should we find?
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Let’s say you increase YD (yearly disposable income) by $1.
When this happens consumption increases by 85 cents since that is the coefficient of YD.
The implication is that the remainder ($1-.85) was saved.
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