Question:
Autonomous consumption is Rs. 600m, MPS = 0.2. If Gross National Disposable Income increases by Rs. 1000m, consumption spending will increase by
(1) Rs. 200m
(2) Rs. 600m
(3) Rs. 800m
(4) Rs. 1400m
(5) Rs. 1600m
Correct Answer:
(3)
Answer Explanation:
If the Marginal Propensity to Save (MPS) is 0.2, then the Marginal Propensity to Consume (MPC) must be 0.8 (since MPC + MPS = 1). The formula for the change in consumption is: $Delta C = MPC times Delta Y$. Therefore, $Delta C = 0.8 times 1000 = 800$. The autonomous consumption of 600 is irrelevant to the change in income.
Topic: Consumption Theory Year: 2019
Leave a Reply