ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -How are MPC and MPS calculated? The marginal propensity to consume (MPC) is found by dividing the change in spending on consumption by the change in someone’s income. The marginal propensity to save (MPS) is similarly found by dividing the change in saving by the change in income.

Detailed explanation-2: -Answer and Explanation: The formula for finding the tax multiplier is T M=MPCMPS T M = MPC MPS where MPC=1−MPS MPC = 1 − MPS . So, the tax multiplier is T M=1−0.20.2=4 T M = 1 − 0.2 0.2 = 4 .

Detailed explanation-3: -An Example of MPS If you decide to spend $400 of this marginal increase on a new business suit and save the remaining $100, your marginal propensity to save is 0.2 ($100 change in saving divided by $500 change in income).

Detailed explanation-4: -In an economy MPC is 0.75. If investment expenditure increases by 500 crores, calculate total increase in income and consumption expenditure. Total increase in income = Increase in investment x K = 500 x 4 = 2, 000 crores. Total increase in consumption expenditure = 0.75 of 2, 000 = 1, 500 crores.