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What is the marginal propensity to consume? How is it related to marginal propensity to save? |
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Answer» Solution :Marginal propensity to Consume (MPC) is DEFINED as the ration of change in consumption to change in INCOME. `MPC=(DeltaC)/(DeltaY)` The VALUE of MPC always lies betweeen 0 and 1, i.e. `0 lt MPC le 1`. Marginal propensity to Save (MPS) is the RATIO of change in savings to change in income. `MPS=(DeltaS)/(DeltaY)` Relationship between MPC and MPS : The sum of the MPC and MPS is always equal to one or MPC+MPS=1 The relationship is derived as follows: We have Y=C+S or `DeltaY=DeltaS` DIVIDING both sides by `DeltaY`, we have `(DeltaY)/(DeltaY)=(DeltaC)/(DeltaY)+(DeltaS)/(DeltaY)` or MPC+MPS=1 or MPC=1-MPS MPS=-1MPC The value of MPS depends on the value of MPC. If MPC=0.70, then MPS=0.30 |
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