Question

Suppose autonomous consumption is 550; there are no taxes; planned investment is 200; government spending is 250; exports are 100; and imports are 300. If equilibrium GDP is $8,000, what is the marginal propensity to consume?

Answer 1

The marginal propensity to consume is 0.6

Step-by-step explanation:

The computation of the marginal propensity to consume is shown below

Given that

Autonomous consumption = 550 = C

Planned investment = 200 = I

Government spending = 250 = G

Exports = 100 = X

Imports = 300 = M

Equilibrium level of GDP = $8,000 = Y

Now as we know that

The equation for aggregate demand is

Y = C + I + G +( X- M)

$8,000 = [550 + b × $8,000] + 200 + 250 + [100 - 300]

7,200 = 8,000b

b = 0.9

Hence, The marginal propensity to consume is 0.6