Question

Suppose that disposable income, consumption, and saving in some country are $400 billion, $350 billion, and $50 billion, respectively. Next, assume that disposable income increases by $40 billion, consumption rises by $32 billion, and saving goes up by $8 billion. a. What is the economy’s MPC?

Answer 1

The economy's MPC is 0.8

Step-by-step explanation:

Marginal propensity to consume
`MPC = (mC)/(mY)`

Where:

• mC is marginal consumption, ie. the additional consumption spending as a result of additional disposable income
• mY is marginal income, ie. the additional disposable income

Marginal consumption is $32 billion, marginal income is $40 billion, so MPC = 32/40 = 0.8