Question 1 of 6beginner💡 UnderstandShort Answer3 marks

What is marginal propensity to consume? How is it related to marginal propensity to save?

Correct Answer

Marginal propensity to consume (MPC) is defined as the change in consumption per unit change in income. It is denoted by cc and is equal to ΔCΔY\frac{\Delta C}{\Delta Y}. It represents the rate of change of consumption as income changes.

Marginal propensity to save (MPS) is related to MPC because savings is that part of income that is not consumed. The context states that MPS=1−MPCMPS = 1 - MPC (or s=1−cs = 1 - c). This relationship implies that the sum of MPC and MPS is always equal to 1 (s+c=1s + c = 1).

Exercise: Exercises | Q: 1 | (Page Page 13)
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Explanation

The answer draws directly from the 'Some Definitions' section of the text. MPC is defined as the ratio of change in consumption to change in income. The relationship with MPS is derived from the identity that Savings equals Income minus Consumption (S=Y−CS = Y - C), which mathematically leads to s=1−cs = 1 - c.

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