Increasing Disposable Income: Impact on Saving

What is the marginal propensity to save (MPS) and how is it calculated?

Given the data that for every $10 million increase in disposable income, saving increases by $2 million, how can we find the MPS?

Calculating the Marginal Propensity to Save (MPS)

The marginal propensity to save (MPS) is the proportion of an increase in disposable income that is saved. It is calculated by dividing the change in savings by the change in disposable income.

In this scenario, with a $10 million increase in disposable income leading to a $2 million increase in saving, we can find the MPS as follows:

MPS = Change in Saving / Change in Disposable Income

MPS = $2 million / $10 million = 0.2

Therefore, the marginal propensity to save (MPS) in this economy is 0.2.

This means that for every additional $1 increase in disposable income, individuals save $0.2, reflecting a tendency to save a portion of their income rather than spending it all.

Understanding the MPS is vital as it helps economists predict how changes in disposable income will impact saving behavior and overall consumption patterns in an economy.