Question : The marginal propensity to save (MPS) is the proportion of an additional:
Option 1: Income that is saved
Option 2: Income that is consumed
Option 3: Investment that is made
Option 4: Government expenditure that is incurred
Correct Answer:
Income that is saved
Solution : The correct answer is (a) Income that is saved.
The MPS represents the fraction of an increase in income that individuals or households choose to save rather than consume. It indicates how much of each additional dollar of income is allocated to saving.
For example, if the MPS is 0.2, it means that for every additional dollar of income, individuals or households will save 20 cents and consume the remaining 80 cents.
The MPS is the complement of the marginal propensity to consume (MPC). Since income can either be consumed or saved, the sum of the MPC and MPS is always equal to 1. In other words, MPC + MPS = 1.
The MPS plays a role in determining the multiplier effect in the economy. A higher MPS implies a larger proportion of income being saved rather than spent, which reduces the immediate impact of changes in autonomous expenditures on aggregate demand and economic growth.
