The correct answer is 0.4.
In macroeconomics, the consumption function describes the relationship between disposable income and consumer spending. Two key concepts within this function are the Marginal Propensity to Consume (MPC) and the Marginal Propensity to Save (MPS).
MPC represents the fraction of an additional dollar of disposable income that is spent on consumption. MPS, conversely, represents the fraction of an additional dollar of disposable income that is saved.
A fundamental identity in macroeconomics states that all disposable income must either be consumed or saved. Therefore, the sum of MPC and MPS always equals 1. This can be expressed mathematically as:
\(MPC + MPS = 1\)
Given that the MPC is 0.6, we can solve for MPS:
\(MPS = 1 - MPC\)
\(MPS = 1 - 0.6\)
\(MPS = 0.4\)
Therefore, if the MPC is 0.6, the MPS is 0.4. This means that for every additional dollar of disposable income, 60 cents are spent on consumption and 40 cents are saved. This relationship is crucial for understanding the multiplier effect in Keynesian economics and predicting the impact of changes in government spending or taxation on aggregate demand.
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