If the MPC is 0.75,a $200 million transfer payment decrease ultimately

Question

Quizplus · Accepted Answer

The MPC (marginal propensity to consume) is the fraction of each additional dollar of income that is spent on consumption. In this case, if the MPC is 0.75, it means that for every additional dollar earned, 75 cents will be spent on consumption. Therefore, if a $200 million transfer payment decrease is implemented, it will reduce disposable income by $200 million. With an MPC of 0.75, the reduction in disposable income will result in a decrease in spending (as 75% of the reduction in income will result in a decrease in spending), which is equal to 75% of the reduction in income, or $150 million. Therefore, the correct answer is C, which states that the transfer payment decrease will ultimately reduce spending by $600 million.

If the MPC Is 0