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Based on the circular flow of income analysis, explain why marginal propensity to consumer plus marginal propensity to save equals one.

      

Based on the circular flow of income analysis, explain why marginal propensity to consumer
plus marginal propensity to save equals one.

  

Answers


Wilfred
Disposable income is either consumed or saved, and any change in this income causes changes in
consumption and savings; the ratio of change in consumption to change in income measures the
marginal propensity to consume (mpc), while the ratio of change in savings to change in income
represents marginal propensity to save (mps).

Thus, if:
C = 0.8 Yd
S = 0.2Yd
Then ?c/?Yd = 0.8 = mpc
and ?s/?Yd = 0.2 = mps
(0.8 + 0.2) = 1; ?mpc + mps = 1.

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Wilfykil answered the question on February 7, 2019 at 05:06


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