Question

If mpc falls from 0.8 to 0.5, then mps rises from:

Options

• 1.0 to 0.5

• 0.5 to 0.2

• 0.2 to 0.5

• 0.8 to 0.5

Answer 1

Using \[mpc+mps=1\]: initially mps = 1 − 0.8 = 0.2, and after the change mps = 1 − 0.5 = 0.5. Thus mps rises from 0.2 to 0.5, which is the decision to save more that triggers the fall in income.