Question

Assume that the linear equation for consumption in a closed economy is C = 40 + 0.8Y. Also, assume that income (Y) is RM400 million.

Determine:     

(a)  the marginal propensity to consume        
(b)  the marginal propensity to save      
(c)  the level of consumption       
(d) the average propensity to consume        
(e)  the level of saving        
(f) the average propensity to save  ​

Answer 1

A) the marginal propensity to save is the number associated with y which is 0.8

B) the marginal propensity to save is 1-0.8 = 0.2

C) replace y with the 400 and solve: c = 40 + 0.8(400) = $360

D) Average propensity to consume = 360/400 = 0.9

E) 400-360 = $40

F) 40/400 = 0.1

Answer 2

Explanation:

(a)

0.8

(b)

Total - 0.8

1 - 0.8

0.2

(c) c = 40 +0.8(y)

c = 40 + 0.8(400)

c = 40 + 320

c = 360

(d) c/y

360/400

36/40

9/10

0.9

(e) 400 - 360

40

(f) 40/400

4/40

1/10

0.1