# If the marginal propensity to consume is 0.80, a \$50 increase in disposable income will lead to a \$___ increase in consumption and a \$___ increase in savings. (Enter both responses to two decimal place.) How to calculate this problem?

Images:
This image has been Flagged as inappropriate Click to unflag In economics, the change in consumption is related to the change in income by the marginal propensity to consume. If consumption changes by dY when the income changes by dX, the marginal propensity to consume is equal to (dY)/(dX). The portion of income that is not consumed is saved. In...

Start your 48-hour free trial to unlock this answer and thousands more. Enjoy eNotes ad-free and cancel anytime.

In economics, the change in consumption is related to the change in income by the marginal propensity to consume. If consumption changes by dY when the income changes by dX, the marginal propensity to consume is equal to (dY)/(dX). The portion of income that is not consumed is saved. In terms of dY and dX as defined earlier, the relation between change in savings and change in income is 1 - (dY)/(dX).

If the marginal propensity to consume is 0.80, an increase in income of \$1, leads to an increase in consumption of \$0.8 and the increase in savings is \$0.2.

MPC = 0.8

dX = \$50

dY = 0.8*50 = 40

1 - (dY)/(dX) = 10

If the disposable income increases by \$50, it will lead to a \$40 increase in consumption and a \$10 increase in savings.

Approved by eNotes Editorial Team