Question

In an economy with no taxes and no imports, disposable income increases from $1,000 to $2,000. If consumption increases from $800 to $_____, the marginal propensity to save is 0.3. 1,000 1,800 1,500 1,200

Answer 1

The increase in consumption when disposable income increases from $1,000 to $2000 is $1,500.00.

What is the increase in consumption?

The formula that would be used to determine the increase in consumption is: initial consumption + (marginal propensity to consume x change in disposable income)

Marginal propensity to consume = 1 - marginal propensity to save

1 - 0.3 = 0.7

Change in disposable income b= $2000 - $1000 = $1000

Increase in consumption = 800 + (0.7 X 1000) = $1500

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