[lz221476]

I am a little confused about this question:

An individual receives an income of $3000 per month, and spends $2500. An increase in income of $500 per month occurs, and the individual spends $2800. the individual’s marginal propensity to save is:

a.0.8

b.0.4

c.0.6

d.0.2

The right answer is 0.4. I thought it was 0.6. 1/MPS*(2800-2500)=500 => MPS=0.6

My questions: Is individual’s MPS different from economy’s MPS? what is my mistake?

Thanks for help!

[M.O.D.]

You are calculating Marginal propensity to consume (spend), which I get 0.6 by solving the linear equation slope:

(2800-2500)/(3000-3500)

What she saves is what she does not consume:

Mathematically, In a closed economy, MPS + MPC = 1

https://en.wikipedia.org/wiki/Marginal_propensity_to_save

So MPS = 1-0.6 = 0.4

BA Mathematics, UC Berkeley
Certificates in CPA and EA preparation, College of San Mateo
CMA I 420, II 470
FAR 91, AUD Feb 2015 (Gleim self-study)

[M.O.D.]

You are calculating Marginal propensity to consume (spend), which I get 0.6 by solving the linear equation slope:

(2800-2500)/(3000-3500)

What she saves is what she does not consume:

Mathematically, In a closed economy, MPS + MPC = 1

https://en.wikipedia.org/wiki/Marginal_propensity_to_save

So MPS = 1-0.6 = 0.4

BA Mathematics, UC Berkeley
Certificates in CPA and EA preparation, College of San Mateo
CMA I 420, II 470
FAR 91, AUD Feb 2015 (Gleim self-study)

[lz221476]

hmm, I understand what you said. But from the Wiley book, 1/MPS × Increase in spending = Increase in GDP .

I don't understand why I couldn't use this formula to calculate this question here.

[lz221476]

hmm, I understand what you said. But from the Wiley book, 1/MPS × Increase in spending = Increase in GDP .

I don't understand why I couldn't use this formula to calculate this question here.

[M.O.D.]

How does Wiley define MPS? Marginal propensity to Spend or Save?

Because from macro-economics, GDP increases by people spending, not saving.

My econ book is all about MPC (consume)

BA Mathematics, UC Berkeley
Certificates in CPA and EA preparation, College of San Mateo
CMA I 420, II 470
FAR 91, AUD Feb 2015 (Gleim self-study)

[M.O.D.]

How does Wiley define MPS? Marginal propensity to Spend or Save?

Because from macro-economics, GDP increases by people spending, not saving.

My econ book is all about MPC (consume)

BA Mathematics, UC Berkeley
Certificates in CPA and EA preparation, College of San Mateo
CMA I 420, II 470
FAR 91, AUD Feb 2015 (Gleim self-study)

[lz221476]

“The effect of the multiplier can be

estimated by examining an economy’s marginal propensity to consume (MPC) and marginal propen sity to save

(MPS). “

I am wondering whether “1/MPS × Increase in spending = Increase in GDP” only applies to macro-economics, like a country's economy. It didn't apply to individual?

[lz221476]

“The effect of the multiplier can be

estimated by examining an economy’s marginal propensity to consume (MPC) and marginal propen sity to save

(MPS). “

I am wondering whether “1/MPS × Increase in spending = Increase in GDP” only applies to macro-economics, like a country's economy. It didn't apply to individual?

[M.O.D.]

Ok, I am reading my econ book:

First, there is no difference between an individual and the economy, because the economy can be made of just one individual. If there are two or more individuals, their individual MPC and MPS are (weighted-)averaged together to make up the economy MPC and MPS.

Second, the econ formula is change in GDP = (1/(1-MPC)) x change in spending

Wily rewrites this as change in GDP = (1/MPS) x change in spending

This is fine.

Incorrect application deleted.

BA Mathematics, UC Berkeley
Certificates in CPA and EA preparation, College of San Mateo
CMA I 420, II 470
FAR 91, AUD Feb 2015 (Gleim self-study)

[M.O.D.]

Ok, I am reading my econ book:

First, there is no difference between an individual and the economy, because the economy can be made of just one individual. If there are two or more individuals, their individual MPC and MPS are (weighted-)averaged together to make up the economy MPC and MPS.

Second, the econ formula is change in GDP = (1/(1-MPC)) x change in spending

Wily rewrites this as change in GDP = (1/MPS) x change in spending

This is fine.

Incorrect application deleted.

BA Mathematics, UC Berkeley
Certificates in CPA and EA preparation, College of San Mateo
CMA I 420, II 470
FAR 91, AUD Feb 2015 (Gleim self-study)

[lz221476]

500 = 1/MPS x 300

MPS = .6

Are you also agreeing the answer should be 0.6? but Wiley said it was supposed to be 0.4.

[lz221476]

500 = 1/MPS x 300

MPS = .6

Are you also agreeing the answer should be 0.6? but Wiley said it was supposed to be 0.4.

[M.O.D.]

from econ:

MPC = delta spending/delta income

MPC = 300/500 = .6

therefore MPS = .4

This needs to be calculated for individuals, however for the economy,

there are infinite rounds of income and spending, because every dollar spent, is a dollar earned by someone else.

total increase in GDP = ( 1 + MPC + MPC squared + MPC ^3 + etc.) x autonomous increase

mathematically this becomes 1/(1-MPC) x autonomous increase.

So no, we cannot use the formula for the infinite rounds increase to the economy (which is called the “multiplier”) to calculate individual MPC or MPS.

See if Wiley has a formula for individual MPC, MPS.

BA Mathematics, UC Berkeley
Certificates in CPA and EA preparation, College of San Mateo
CMA I 420, II 470
FAR 91, AUD Feb 2015 (Gleim self-study)

[M.O.D.]

from econ:

MPC = delta spending/delta income

MPC = 300/500 = .6

therefore MPS = .4

This needs to be calculated for individuals, however for the economy,

there are infinite rounds of income and spending, because every dollar spent, is a dollar earned by someone else.

total increase in GDP = ( 1 + MPC + MPC squared + MPC ^3 + etc.) x autonomous increase

mathematically this becomes 1/(1-MPC) x autonomous increase.

So no, we cannot use the formula for the infinite rounds increase to the economy (which is called the “multiplier”) to calculate individual MPC or MPS.

See if Wiley has a formula for individual MPC, MPS.

BA Mathematics, UC Berkeley
Certificates in CPA and EA preparation, College of San Mateo
CMA I 420, II 470
FAR 91, AUD Feb 2015 (Gleim self-study)

[lz221476]

thx!

[Author]

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