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Marginal Propensity to Spend

An economy’s marginal propensity to spend is defined as the fraction of any increment to national income that will be spent on purchasing domestic output. The slop of the AE curve whose ‘marginal propensity to spend’ (Z). Symbolically,

                Z = Δ AE / ΔY

Where    Z = Marginal propensity to spend,
                Δ AE = Change in aggregate spending, and
                ΔY = Change in national income.


Suppose, in an economy the level of national income is Rs. 300 crores and aggregate spending is also Rs. 300 crores. Now, the national income rises to Rs. 400 crores, and aggregate spending to Rs. 360 crores. The marginal propensity to spend of the economy can be calculated as follow:

Z = ΔAE / ΔY = Rs. 60 crores / Rs. 100 crores  = 0.6 or 60%

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