Question

If MPS = 0.4, then MPC will be

• A. 40%
• B. 50%
• C. 60%
• D. 70%.

Hint:

Remember that MPC and MPS are two sides of the same coin (an extra dollar of income). They must always add up to 1 (or 100%). If you know one, you can instantly find the other by subtracting it from 1.

Answer 1

The Correct Option is C

Step 1: Understanding the Concept:
In Keynesian economics, any change in disposable income (\( \Delta Yd \)) is either consumed or saved. - Marginal Propensity to Consume (MPC) is the proportion of an additional unit of income that is consumed. \( MPC = \frac{\Delta C}{\Delta Yd} \). - Marginal Propensity to Save (MPS) is the proportion of an additional unit of income that is saved. \( MPS = \frac{\Delta S}{\Delta Yd} \).
Step 2: Key Formula or Approach:
The sum of the MPC and the MPS is always equal to 1, because the entire additional income is either spent or saved. \[ MPC + MPS = 1 \] Step 3: Detailed Explanation:
We are given the value of MPS: \[ MPS = 0.4 \] Using the formula from Step 2, we can find the MPC: \[ MPC + 0.4 = 1 \] \[ MPC = 1 - 0.4 \] \[ MPC = 0.6 \] To express this as a percentage, we multiply by 100: \[ MPC = 0.6 \times 100% = 60% \] Step 4: Final Answer:
If MPS is 0.4, then MPC will be 0.6, which is equivalent to 60%. The correct option is (C).