Question

As the marginal propensity to consume (MPC) increases, the spending multiplier:______.a. remains the same. b. increases. c. decreases. If the marginal propensity to consume is 0.60, then, assuming there are no taxes or imports, what is the multiplier?

Answer 1

b. increases ; 2.5

Step-by-step explanation:

MPC stands for Marginal Propensity to Consume. In economics, the MPC may be defined as the metric that quantifies the induced consumption. It is the concept that determines that the increase in the spending of personal consumer occurs with increase in the disposable income.

It is estimated that as the MPC increases, the spending multiplier also increases. MCP is the ratio of consumption function to the disposal income change. When the MCp is 0.6, then the multiplier becomes 2.5 if there is no imports and taxes involved.