If the marginal propensity to consume is 0.75,net taxes are fixed at $2,000 and real income rises by $12,000,by how much will real consumption spending increase?
A) $9,000
B) $8,000
C) $7,500
D) $7,000
E) $10,000

Question

Quizplus · Accepted Answer

Explanation: The marginal propensity to consume (MPC) is the fraction of any change in income that is spent on consumption. In this case, the MPC is 0.75, which means that for every $1 increase in income, $0.75 is spent on consumption. Net taxes are fixed at $2,000, which means that they do not change as income changes. Real income rises by $12,000, which means that disposable income (income after taxes) increases by $12,000. The increase in real consumption spending is equal to the MPC multiplied by the increase in disposable income. In this case, the increase in real consumption spending is 0.75 * $12,000 = $9,000.

If the Marginal Propensity to Consume Is 0