Kara earns $1,500 a month and from that pays an overall tax rate of 15 percent. On average she saves $255 per month. What is her marginal propensity to consume and her marginal propensity to save?
What will be an ideal response?
MPC = 0.8 (or 80 percent) and MPS = 0.2 (or 20 percent).
Kara’s disposable income (after taxes) is $1,275. $255 is 20 percent of $1,275, and the remaining $1,020 is 80 percent of $1,275.
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