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25 February, 21:54

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 $18 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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  1. 25 February, 23:32
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    Answer and Explanation:

    The computation is shown below:

    Marginal Propensity to Consume (MPC) = change in consumption change in disposable income

    = $18 billion : $20 billion

    = 0.9

    Marginal Propensity to Save (MPS) = change in saving : change in disposable income

    = $2 billion : $20 billion

    = 0.10

    b) APC before the increase in disposable income

    The average propensity to consume (APC) = Consumption (C) : Disposable income (Y)

    = $150 billion : $200 billion

    = 0.75

    For After the increase in the disposable income, first we have to determine the new disposable income and the new consumption which is

    New disposable income is

    = $200 billion + $20 billion

    = $220 billion

    And,

    New consumption is

    = $150 billion + $18 billion

    = $168 billion

    Now

    APC = new consumption : new disposable income

    = $168 billion : $220 billion

    = 0.76

    We simply applied the above formulas
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