In the context of a consumption function for an economy, if MPC = 0.6, then what is the likely value of MPS?
Show answer & explanation
Correct answer: D
Explanation
The correct answer is option 4 i.e. 0.4.
In the context of a consumption function, the Marginal Propensity to Save (MPS) is calculated as:
MPS = 1 – MPC
Given that MPC = 0.6, we get:
MPS = 1 – 0.6 = 0.4
So, the correct answer is 0.4. This means that for every additional rupee earned, 60 paise is spent (MPC), and 40 paise is saved (MPS). MPC and MPS always add up to 1 in a closed economy with no government or foreign trade.