Question

Suppose that an initial $10 billion increase in investment spending expands GDP by $10 billion in the first round of the multiplier process. Also suppose that GDP and consumption both rise by $6 billion in the second round of the process. Instructions: In parts a and b, round your answers to 1 decimal place. In part c, enter your answer as a whole number. a. What is the MPC in this economy

Answer 1

Answer: 0.6

Step-by-step explanation:

The Marginal Propensity to Consume (MPC) measures how much of an additional dollar of income is spent on consumption.

When the GDP which is aggregate income rose by $10 billion, consumption rose by $6 billion.

MPC = Change in Consumption / Change in GDP

= 6 billion / 10 billion

= 0.6