Answer:
mpc is equal to 0.75
Step-by-step explanation:
This can be calculated as follows:
Increase in real gdp = multiplier * change in investment spending ............ (1)
Where;
Increase in real gdp = $160 million
multiplier = ?
change in investment spending = $40 million
By suppressing the million, substitute the values into equation (1) and solve for multiplier, we have:
$160 = mpc * $40
multiplier = $160 / $40 = 4
The multiplier is given as follows:
multiplier = 1 / (1 - mpc) .................... (2)
Substituting multiplier = 4 into equation (2), and solve for mpc, we have:
4 = 1 / (1 - mpc)
4(1 - mpc) = 1
4 - 4mpc = 1
4 - 1 = 4mpc
3 = 4mpc
mpc = 3 / 4
mpc = 0.75
Therefore, marginal propensity to consume (mpc) is equal to 0.75.