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Suppose that disposable income, consumption, and saving in some country are $200 billion, $150 billion, and $50 billion, respectively. Next, assume that disposable income increases by $20 billion, consumption rises by $16 billion, and saving goes up by $4 billion, and saving goes up by $2 billion. What is the economy's MPC? Its MPS? What was the APC before the increase in disposable income? After the increase?

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Answer:

A. MPC = 0.9

B. MPS = 0.1

C. APC= 0.75

D. APC= 0.764

Explanation:

a. Calculation for the economy's MPC (Marginal propensity to consume)

Using this formula

MPC = ΔConsumption/ΔIncome

Let plug in the formula

MPC = $18/$20

MPC = 0.9

Therefore the economy's MPC (Marginal propensity to consume) will be 0.9

b. Calculation for What is its MPS (Marginal propensity to save)

Using this formula

MPS = ΔSaving/ΔIncome

Let plug in the formula

MPS = $2/$20

MPS = 0.1

Therefore its MPS will be 0.1

c. Calculation for What was the APC ( Average propensity to consume ) before the increase in disposable income

Using this formula

APC = Consumption/Income

Let plug in the formula

APC = $150/$200

APC= 0.75

Therefore APC will be 0.75

d. Calculation for What was the APC after the increase

First step is to calculate the disposable income

Disposable income=$200 + $20

Disposable income=$220

Second step is to calculate the Consumption after the change

Consumption after the change =$150 + $18

Consumption after the change =$168

Now let calculate the APC after the increase

APC = $168/$220

APC= 0.764

Therefore APC after the increase will be 0.764

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