Assume that the Real GDP for an economy is $7500 and consumption is $6750

Economics Dec 17, 2020

Assume that the Real GDP for an economy is $7500 and consumption is $6750. What is total savings in this economy? What is the marginal propensity to consume? What is the marginal propensity to save?

Expert Solution

Real GDP is also real income for a country. The part of income that is not consumed, must be saved. If real income is $7500, then total savings is $7500 - $6750 = $750.

The marginal propensity to consume (MPC) is defined as total consumption divided by total income. In our example, that means the MPC = $6750/$7500 = 0.90. The marginal propensity to save (MPS) can be found by 1-MPC, since MPC + MPS = 1. In this example, the MPS = 1 - 0.90 = 0.10.

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