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The Saving Function quiz

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  • What does the savings function relate?
    The savings function relates household savings to the level of disposable income.
  • What happens to savings and consumption when disposable income increases?
    Both savings and consumption increase as disposable income rises.
  • What is the marginal propensity to save (MPS)?
    The MPS is the change in savings divided by the change in disposable income.
  • How is the MPS represented on the savings function graph?
    The MPS is the slope of the savings function.
  • Is the marginal propensity to save usually larger or smaller than the marginal propensity to consume?
    The MPS is typically smaller than the marginal propensity to consume (MPC).
  • What does the 45-degree line on the savings function graph represent?
    It represents the scenario where all disposable income is saved and none is consumed.
  • At a point where the savings function touches the 45-degree line, what is happening?
    All disposable income is being saved at that point.
  • What does it mean if a point on the savings function is below the 45-degree line?
    It means only part of the disposable income is being saved, and the rest is consumed.
  • Why is the savings function generally shallower than the consumption function?
    Because households tend to consume most of their extra income and save only a small portion.
  • What is disposable income used for?
    Disposable income is used for either consumption or savings.
  • What does the marginal propensity to consume (MPC) measure?
    The MPC measures the change in consumption divided by the change in disposable income.
  • If you receive a bonus, what typically happens to your savings?
    Your total savings are likely to increase, though you will also increase your consumption.
  • What does a point on the savings function above the 45-degree line imply?
    It would imply saving more than your disposable income, which is not realistic.
  • How do you calculate the marginal propensity to save?
    Divide the change in savings by the change in disposable income.
  • Why is the MPS important in understanding household behavior?
    It shows how much of each additional dollar of income households are likely to save.