Question

calculate mpc when a change in investment spending of $40 million leads to an increase in real gdp by $160 million

Answer 1

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.