If the MPC equals 0.75,a $100 billion transfer payment decrease will decrease consumption in the first round by

Question

Quizplus · Accepted Answer

The MPC (Marginal Propensity to Consume) refers to the proportion of additional income that an individual or household will spend on consumption. With an MPC of 0.75, it means that for every additional $1 received as income, $0.75 will be spent on consumption.

Therefore, if there is a $100 billion transfer payment decrease, it means that people will have $100 billion less in income. Given the MPC of 0.75, it means that $75 billion (0.75 x 100 billion) will be spent on consumption in the first round. This means that consumption will decrease by $75 billion in the first round, hence the answer is B, $75 billion.

If the MPC Equals 0