Question

Suppose that an initial $20 billion increase in investment spending expands GDP by $20 billion in the first round of the multiplier process. Also assume that GDP and consumption both rise by $18 billion in the second round of the process. Instructions: Round your answers to 1 decimal place. a. What is the MPC in this economy

Answer 1

Answer: 0.9

Step-by-step explanation:

The marginal propensity to consume (MPC) is calculated by using the formula:

= Change in consumption / Change in income

where,

Change in consumption = $18 billion

Change in income = $20 billion

MPC = Change in consumption / Change in income

= $18 billion / $20 billion

= 0.9

Therefore, MPC is 0.9.