Question

The marginal propensity to consume is the: A. amount by which disposable income increases when consumption increases by $1. B. amount by which consumption increases when disposable income increases by $1. C. percentage by which consumption increases when disposable income increases by $1. D. percentage by which disposable income increases when consumption increases by $1.

Answer 1

Marginal propensity to consume is the amount by which consumption increases when disposable income increases by $1 (B)

Step-by-step explanation:

The study of Marginal Propensity to Consume is an economic theory stemming from John Keynes theory on the Macroeconomics. keynes ultimately believed the driver for any economy's growth is consumer spending, and as such it was key for all Government to stimulate demand to foster growth.

Marginal propensity to Consume (MPC) = change in consumption divided by change in ones income

Thus, if income of Mr. A increases by $2,000 in a certain year and he spends $1,500 on meeting his needs/wants; the MPC of Mr. A will be:

$1,500 divided by $2,000 = 0.75

Note that MPC isn't a fixed number for all income earners. Typically, it seems the higher the disposable income the lower the MPC is. This is because the higher one earns the more likely his needs/Wants are met; as such an increase in earnings will more likely be saved or invested.

Answer 2

B. amount by which consumption increases when disposable income increases by $1

Step-by-step explanation:

As people has an archetypical choise betwene consume(use) or save (don't use) their income. Economics state there is a marginal prpensity in the agent to consume while other save but of these add to 1 as both options add to the entire income.

hus when income increase by $1 the marginal propensity to consume are the cent used while marginal propensity to save are the cent which are not used.