Question

Suppose that consumption is $500 and that the marginal propensity to consume is 0.4. If disposable income increases by $200, how much will consumption spending increase by?

Answer 1

The marginal propensity to consume (MPC) is the proportion of an increase in disposable income that is spent on consumption. In this case, the MPC is 0.4, which means that for every additional dollar of disposable income, 40 cents will be spent on consumption.

Given that consumption is $500 and disposable income increases by $200, we can calculate the increase in consumption spending as follows:

Increase in consumption spending = MPC x increase in disposable income

Increase in consumption spending = 0.4 x $200

Increase in consumption spending = $80

Therefore, consumption spending will increase by $80 when disposable income increases by $200, assuming an MPC of 0.4.

Step-by-step explanation: