What does the marginal propensity to save describe?

What does the marginal propensity to save describe?

• A. The increase in consumer spending when income rises by $1.
• B. The increase in household savings when disposable income rises by $1.
• C. The ratio of debt to income.
• D. The change in prices when income changes.

Answer: (B)

The marginal propensity to save shows how much of each extra dollar of disposable income gets saved rather than spent. It’s defined as the change in saving divided by the change in disposable income, ΔS/ΔYD. If income rises by $1 and saving increases by $0.25, the MPS is 0.25. This links to the idea that MPC + MPS = 1 (with taxes and other leaks held constant), and it affects the fiscal multiplier—the higher the MPS, the smaller the multiplier because more of the extra income is saved instead of spent. The description in this item matches that precise idea: savings rise when disposable income rises by a dollar. The other options describe spending (not saving), a debt-to-income ratio, or price changes, which are not what MPS measures.

The marginal propensity to save shows how much of each extra dollar of disposable income gets saved rather than spent. It’s defined as the change in saving divided by the change in disposable income, ΔS/ΔYD. If income rises by $1 and saving increases by $0.25, the MPS is 0.25. This links to the idea that MPC + MPS = 1 (with taxes and other leaks held constant), and it affects the fiscal multiplier—the higher the MPS, the smaller the multiplier because more of the extra income is saved instead of spent. The description in this item matches that precise idea: savings rise when disposable income rises by a dollar. The other options describe spending (not saving), a debt-to-income ratio, or price changes, which are not what MPS measures.