Question

. Explain how each of the following would affect MPCs. In other words, indicate if the following situations would cause the MPC to increase or decrease. a. Households become pessimistic about the future, economically. b. An individual has 200 acres of land. The value of each acre has increased. c. Interest rates decrease. d. Balances in retirement accounts decline due to a decline in stock prices.

Answer 1

Marginal Propensity to Consume evaluates the relationship between income increment and rate of consumption. Based on this, MPC could increase or decrease based on certain factors.

Step-by-step explanation:

Generally speaking, Marginal Propensity to consume increases when income level is low and the higher the income, the lower the MPC.

This is because utility maximization is directly proportional to increased income. When an individual's wants is met, they reduce their propensity to consume and invest instead.

At low-income levels, survival is the end goal. therefore, the marginal propensity to consume is higher.

Based on the foregoing, When:

a. Households become pessimistic about the future, economically. MPC increases

b. An individual has 200 acres of land. The value of each acre has increased. MPC reduces

c. Interest rates decrease. MPC reduces because the economy is stimulated to increase income holding and investment is encouraged

d. Balances in retirement accounts decline due to a decline in stock prices. MPC increases.