Question

Assume that investment and government expenditures are $500 billion and $550 billion, respectively. Compute the MPC.

a) 0.90
b) 0.80
c) 0.70
d) 0.60

Answer 1

The marginal propensity to consume (MPC) is the proportion of additional disposable income that individuals choose to spend on goods and services. In this scenario, the MPC is approximately 0.48, which is not one of the options provided (0.90, 0.80, 0.70, or 0.60).

Step-by-step explanation:

The marginal propensity to consume (MPC) is the proportion of additional disposable income that individuals choose to spend on goods and services. It is calculated by dividing the change in consumption by the change in income. In this case, we are given that investment is $500 billion and government expenditures are $550 billion. Assuming that the change in income is equal to the change in consumption, we can use the equation MPC = Change in consumption / Change in income. By substituting the given values, we have:

MPC = 500 / (500 + 550) = 500 / 1050 = 0.476 (rounded to two decimal places)

Therefore, the MPC is approximately 0.48, which is not one of the options provided. Hence, none of the given options (a, b, c, or d) are correct for this scenario.