Macroeconomics
● AhighMPCindicatesthatindividualsorhouseholdstendtospendasignifcantportion of any additional income they receive, which can stimulate economic growth during periods of increased income. ● Conversely, a low MPC suggests that individuals savemoreoftheiradditionalincome, which may result in slower economic growth. 2. The marginal propensitytosave(MPS) ,ontheotherhand,calculates theproportionofextra income that is saved . = ℎ ℎ ∆ ∆ Assume that following an increase in income by $100, an individual savedanadditional$20. Therefore, MPS = 20/100 = 0.2. In practical terms, this means that for every additional $1 earned, $0.2 is saved. ● The MPS is an economic indicatorthatquantifes howsavingsrespondtochangesin income. ● The value of the MPS for the whole economy must be between 0 and 1 because consumers might savesome(0<MPS<1),none(MPS=0),oralloftheirincreasesin incomes (MPS = 1). ● AhigherMPSsuggeststhatevensmallchangesinincomeresultinsignifcant changes in savings , while a lower MPS indicates that income fluctuations have a relatively smaller impact on savings . The Relationship between MPC and MPS The relationship between MPC and MPS is complementary. They add up to 1, which means that any additional income received by individuals is either spent (MPC) orsaved(MPS).Inotherwords,every dollar of additional income is either used for consumption or saved. MPS =
Mathematically,itcanbeexpressedas:MPC+MPS= 1. Therefore, MPC and MPS can also be calculated as follows:
MPC = 1 − MPS MPS = 1 − MPC
For example, if the MPC is 0.80(80%),thentheMPS must be 0.20 (20%) to make the total equal to 1 (100%).
Understanding the relationship between MPS and MPC isvitalforeconomistsandpolicymakerswhen analyzingtheimpactofchangesinincomeorgovernmentpoliciesonconsumptionandsavingpatterns
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