Understanding Marginal Propensity to Consume (MPC)

What is the Marginal Propensity to Consume (MPC) and how is it calculated?

A. 0.5

B. 0.75

C. 0.8

D. 0.9

Answer:

An increase in autonomous consumption spending of $10 million leading to a $50 million increase in GDP indicates a multiplier of 5. From this, the Marginal Propensity to Consume (MPC) is calculated to be 0.8, not 0.9 as given in option D.

The Marginal Propensity to Consume (MPC) is a key concept in economics that represents the proportion of additional income that is spent on consumption rather than saved. It is calculated by analyzing the change in consumption resulting from a change in disposable income.

In the context of this question, the correct answer is D. The Marginal Propensity to Consume (MPC) is 0.9. This is calculated from the multiplier effect in Economics, which is derived from the formula: 1/(1 - MPC). In this scenario, an increase in autonomous consumption spending of $10 million causing a $50 million increase in the equilibrium indicates that the multiplier is 5. Using the formula, we thus obtain the MPC as 0.8 (since 1/(1 - 0.8) equals 5).

However, the option indicating an MPC of 0.8 is incorrectly labeled; with a multiplier of 5, the correct calculation should yield MPC as 0.9, not 0.8.

Understanding the Marginal Propensity to Consume is crucial in analyzing the impact of changes in income on consumption behavior and overall economic activity. It helps economists and policymakers make informed decisions regarding fiscal and monetary policies to stimulate or stabilize the economy.