No Bull Economics Lessons

Macroeconomics & Microeconomics Concepts You Must Know

AD/AS and Fiscal Policy (3 of 10)

Question 3:
Assume that disposable income increases by $2,000. If the marginal propensity to save is 0.25, consumer expenditures will increase by

A.  $500
B.  $1,000
C.  $1,500
D.  $2,000
E.  $2,025

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Correct Answer: C, $1,500. If the marginal propensity to save (MPS) is 0.25 then the marginal propensity to consume (MPC) is 0.75. This means that consumers will spend 75% of their disposable income ($2,000 x 0.75 = $1,500) and save 25% ($2,000 x 0.25 = $500). MPC + MPS = 1 because disposable income can either be spent or saved.