Suppose that income taxes are reduced by $400 billion and households increase consumption by
80% of the resulting change in disposable income. Suppose also that the multiplier is 2.
What is the marginal propensity to consume?

Question

Quizplus · Accepted Answer

The marginal propensity to consume (MPC) is the fraction of additional income that a household consumes. Here, households increase consumption by 80% of the change in disposable income, which means the MPC is 0.8.

Suppose That Income Taxes Are Reduced by $400 Billion and Households