Practice with APC, APS, MPC and MPS

Part A
Average Propensities
The average propensity to consume (APC) is the ratio of consumption expenditures (C) to disposable
income (DI), or APC = C / DI.
The average propensity to save (APS) is the ratio of savings (5) to disposable income) or APS

=S / DI.

1. Using the data in Figure 20.1, calculate the APC and APS at each level of disposable income given.
The first calculation is completed as an example.

II Figure 20.1
Average Propensities to Consume and to Save
Disposable
Income

Consumption

Saving

APe

$0

$2,000

-$2,000

2,000

3,600

-1,600

4,000

5,200

-1,200

6,000

6,800

-800

8,000

8,400

-400

10,000

10,000

12,000

11,600

1.8

APS

-0.8

400

2. How can savings be negative? Explain.

PartB
Marginal Propensities
The marginal propensity to consume (MPC) .is the change in consumption divided by the change in dis
posable income. It is a fraction of any change in DI that is spent on consumer goods: MPC = dC / WI.
The marginal propensity to save (MPS) is the fraction saved of any change in disposable income.
The MPS is equal to the change in saving divided by the change in DI: MPS =~S / dDI.
3. Using the data in Figure 20.2, calculate the MPC and MPS at each level of disposable income. The
first calculation is completed as an example. (This is not a typical consumption function. Its pur
pose is to provide practice in calculating MPC and MP5.)
Activity written by John lv'lorton, National Council on Economic Education, New York, N.Y., and James Spellicy, Lowell High School,
San Francisco, Calif.
Advanced Placement Economics ?\1acroeconomics: Student Activities

National Council on Economic Education.

NewYor~ N.Y.

111

II Figure 20.2
Marginal Propensities to Consume and to Save
Disposable
Income

Consumption

Saving

$12,000

$12,100

-$100

13,000

13,000

14,000

13,800

200

15,000

14,500

500

16,000

15,100

'900

17,000

15,600

1,400

MPC

MPS

0.90

0.10

4. Why must the sum of MPC and MPS always equal I?

Parte

II Figure 20.3

Changes in APe and MPC as DI Increases

Disposable
Income

Cqnsumption
...

Savings

$10,000

$12,000

-$2,000

20,000

21,000

-1,000

30,000

30,000

40,000

39,000

1,000

50,000

48,000

2,000

60,000

57,000

3,000

70,000

66,000

APe

APS

MPC

MPS

s. Complete Figure 20.3, and answer the questions based on the completed table.
6. What is the APC at a DI level of $10~OOO?

At $20,OOO?

7. What happens to the APe as DI rises?

8. What is the MPC as DI goes from $50,000 to $60,OOO?

9. What happens to MPC as income rises?
as income rises?

From $60,000 to $70,000?

What happens to MPS

_

10. \Vhat is the conceptual difference between APC and MPC?

112

Advanced Placement Economics ~1acroeconomics: Student Activities National Council on Economic Education, New Yor~ N.Y.

4. Suppose you are given the follo\ving inforlnation about

GDP~ T is taxes, and C is consulnption spending.
Year

100
150

50
50
50

80

2
3

300

Macroland~

40

200

a. Fill in the following table using the inforlnation in the table.

Year

Disposable Income

2
3

b. What is the MPC for this economy?

c. What is the MPS for this economy?

d. What is the value of the multiplier for this economy?

where Y is real

Problems and Exercises

1. Consider an economy that is initially in long-run equilibrium as drawn in the fol
lowing graph where LRAS is the long-run AS curve, AD 1 is the aggregate demand
curve, SRAS 1 is the short-run AS curve, Yl is potential output, and Pl is the equilib
rium aggregate price level.
Aggregate
price Level

LRAS

Aggregate output

a. Draw a graph using the AS-AD model to illustrate the effect of each of the fol
lowing separate changes to the model in the short run.
1) The economy's central bank decreases the money supply.

2) Productivity decreases in the economy.

3) Consumer confidence in the economy increases.

4) Commodity prices fall dramatically.

b. Identify verbally what happens to aggregate output and the aggregate price level
relative to the initial long-run equilibrium for each of the scenarios.

c. For each of the scenarios determine whether the economy faces a short-run
recessionary gap or an inflationary gap.

d. For each of the scenarios deternline if there is an active stabilization policy that
will offset the particular shock. If so, discuss what this active stabilization policy
is. You may find it helpful to draw a graph illustrating the effects of your active
policy prescription on the aggregate economy.

e. For each of the scenarios identify what happens in the long run to the aggregate
price level and the aggregate output level if there is no active stabilization policy.

2. Consider an economy operating with an inflationary gap in the short fun. Briefly
describe what this short-run equilibrium looks like, making specific reference to
potential output and then describe the process by which this economy moves from
short-run to long-run macroeconomic equilibrium. Use a graph to illustrate your
description.

3. Consider an economy operating with a recessionary gap in the short-run.

a. Why does this represent a problem for this economy? Draw a graph illustrating

your answer.

b. What policies are available to policymakers to address this problem? Draw

graphs illustrating possible policies.

c. If policymakers do nothing, describe the mechanism by which this economy will

return to long-run macroeconomic equilibrium. Draw a graph illustrating this

long-run adjustment.

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