Answer to Question #50393 in Macroeconomics for abdulla sabit

Question

What is MPC? "There is a trade-off between MPC and MPS"-prove the statement.

Answer 1

There's only two options when you earn a dollar. You can save it or you can spend it. The marginal propensity to consume (MPC) shows us the change in consumption when income either decreases or increases. When you look at a consumption schedule, you will see consumption go up as income goes up. Consumption only increases by a portion of what income increases by. This is due to our MPC. We don't spend everything we earn. This means consumption does not go up as quickly as income. It should also be noted that the MPC is the slope of the consumption line. The slope of income is 1. MPC is a smaller number (I believe it's about .85 or .95 in the U.S.). If MPC equals 1, then the we are spending everything that we earn. This would mean that the consumption line and the income line would be identical. The MPS is everything else that we do not consume. MPS is the slope of the saving schedule. It increases at a slower rate than consumption and income. MPS + MPC must always equal to 1. For economic purposes, if you are not spending the money you earned. You are considered to be saving that money. This means that if MPC is .85 then MPS is .15. This means that for every dollar you earn, you spend 85 cents and save 15 cents. So, the statement is true.