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If national income increases from $410 to $430 billion and the marginal propensity to save is 0.25, then savings will increase from $5 to billion.

Question

If national income increases from 410to410 to 430 billion and the marginal propensity to save is 0.25, then savings will increase from $5 to billion.

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Solution

The increase in national income is 430billion430 billion - 410 billion = $20 billion.

The marginal propensity to save (MPS) is the increase in savings divided by the increase in income. In this case, the MPS is 0.25.

So, the increase in savings is MPS * increase in income = 0.25 * 20billion=20 billion = 5 billion.

Therefore, savings will increase from 5billionto5 billion to 5 billion + 5billion=5 billion = 10 billion.

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