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It is a macroeconomic formula indicated as MPS = ΔS / ΔY. It shows how the household sector makes use of extra income.
The term indicates the portion of additional income that can lead to induced saving as part of fundamental psychological law where one can find how much each extra dollar of income can be kept for the future.
The term can be shown as a slope of the saving line. It cannot be a constant as it changes with income as the analysis of savings can be made with a constant MPS.
It can become part of the multiplier process and can affect the magnitude of expenses and tax multipliers. The multiplier measures the magnitude of change caused by the transformation in production-generated income which can lead to consumption.
At the low-income level, the consumer buys necessities but with the increase in income, they may try investing in the future like long-term investing in housing or a car.
This can influence the marginal propensity to save MPS. In conditions, where income level rises, extra income has less utility and it may lead to more savings.
The life cycle hypothesis finds that consumption can be higher in the early age of studying but as you enter a later stage in life with a better-paid job, you will be in the position to accumulate more.
Individual preferences influence the life cycle hypothesis where one may not put away even with higher wages, whereas, risk-averse people may keep even in the early life stage.
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