{"id":214673,"date":"2025-05-15T07:51:40","date_gmt":"2025-05-15T07:51:40","guid":{"rendered":"https:\/\/learnexams.com\/blog\/?p=214673"},"modified":"2025-05-15T07:51:42","modified_gmt":"2025-05-15T07:51:42","slug":"suppose-disposable-income-increases-by-2000-as-a-result-consumption-increases-by-1500","status":"publish","type":"post","link":"https:\/\/www.learnexams.com\/blog\/2025\/05\/15\/suppose-disposable-income-increases-by-2000-as-a-result-consumption-increases-by-1500\/","title":{"rendered":"Suppose disposable income increases by $2,000. As a result, consumption increases by $1,500"},"content":{"rendered":"\n

Suppose disposable income increases by $2,000. As a result, consumption increases by $1,500. Answer the following questions based on this information. Where appropriate, enter your answer as a decimal rather than as a percentage.<\/p>\n\n\n\n

The increase in savings resulting directly from this change in income is:<\/p>\n\n\n\n

The marginal propensity to save (MPS) is:<\/p>\n\n\n\n

The Correct Answer and Explanation is:<\/mark><\/strong><\/p>\n\n\n\n

To answer this question, we begin by understanding the relationships among income, consumption, and savings.<\/p>\n\n\n\n

\n\n\n\n

Given:<\/strong><\/h3>\n\n\n\n
    \n
  • Increase in disposable income<\/strong> = $2,000<\/li>\n\n\n\n
  • Increase in consumption<\/strong> = $1,500<\/li>\n<\/ul>\n\n\n\n
    \n\n\n\n

    Part 1: The increase in savings<\/strong><\/h3>\n\n\n\n

    Disposable income is divided into consumption<\/strong> and savings<\/strong>. That is: Income=Consumption+Savings\\text{Income} = \\text{Consumption} + \\text{Savings}<\/p>\n\n\n\n

    So, to find the increase in savings<\/strong>, we subtract the increase in consumption from the increase in income: Increase in savings=$2,000\u2212$1,500=$500\\text{Increase in savings} = \\$2,000 – \\$1,500 = \\boxed{\\$500}<\/p>\n\n\n\n

    \n\n\n\n

    Part 2: The Marginal Propensity to Save (MPS)<\/strong><\/h3>\n\n\n\n

    The Marginal Propensity to Save (MPS)<\/strong> measures the proportion of additional<\/strong> income that is saved rather than spent on consumption. It is calculated as: MPS=Change in SavingsChange in Income=5002000=0.25\\text{MPS} = \\frac{\\text{Change in Savings}}{\\text{Change in Income}} = \\frac{500}{2000} = \\boxed{0.25}<\/p>\n\n\n\n

    \n\n\n\n

    Explanation (300+ words):<\/strong><\/h3>\n\n\n\n

    The concepts of marginal propensity to consume (MPC)<\/strong> and marginal propensity to save (MPS)<\/strong> are foundational in macroeconomics, especially in understanding how changes in income affect the economy. These two metrics represent the fraction of any additional dollar of income that a household will either spend or save.<\/p>\n\n\n\n

    In this scenario, a household receives an additional $2,000 in disposable income. Of this, $1,500 is used for consumption, meaning the remaining $500 must be saved. This gives us an immediate understanding of how this household allocates new income.<\/p>\n\n\n\n

    The marginal propensity to consume (MPC)<\/strong> is: MPC=15002000=0.75\\text{MPC} = \\frac{1500}{2000} = 0.75<\/p>\n\n\n\n

    Since income can only go to consumption or saving, the sum of MPC and MPS is always equal to 1: MPC+MPS=1\u21d20.75+0.25=1\\text{MPC} + \\text{MPS} = 1 \\Rightarrow 0.75 + 0.25 = 1<\/p>\n\n\n\n

    This makes MPS = 0.25, which means that for every additional dollar the household earns, it saves 25 cents.<\/p>\n\n\n\n

    Understanding MPS is crucial for policymakers. For instance, a lower MPS implies more spending and higher short-term economic activity. In contrast, a higher MPS means more saving, which might be beneficial for long-term investment but may dampen immediate economic growth.<\/p>\n\n\n\n

    In sum, the increase in savings from the $2,000 income increase is $500, and the marginal propensity to save is 0.25<\/strong>, reflecting the portion of extra income that is not spent but rather saved for the future.<\/p>\n","protected":false},"excerpt":{"rendered":"

    Suppose disposable income increases by $2,000. As a result, consumption increases by $1,500. Answer the following questions based on this information. Where appropriate, enter your answer as a decimal rather than as a percentage. The increase in savings resulting directly from this change in income is: The marginal propensity to save (MPS) is: The Correct […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"site-sidebar-layout":"default","site-content-layout":"","ast-site-content-layout":"default","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","ast-disable-related-posts":"","theme-transparent-header-meta":"","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"default","ast-page-background-enabled":"default","ast-page-background-meta":{"desktop":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"ast-content-background-meta":{"desktop":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"footnotes":""},"categories":[25],"tags":[],"class_list":["post-214673","post","type-post","status-publish","format-standard","hentry","category-exams-certification"],"_links":{"self":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/posts\/214673","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/comments?post=214673"}],"version-history":[{"count":0,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/posts\/214673\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/media?parent=214673"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/categories?post=214673"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/tags?post=214673"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}