Suppose disposable income increases from $5 trillion to $6 trillion. As a result, consumption expenditure increases from $4 trillion to_________ . This result means the MPC equals_________ .

Question

Quizplus · Accepted Answer

From the information given, we can calculate the marginal propensity to consume (MPC) as the change in consumption expenditure divided by the change in disposable income:

MPC = (4.8 trillion - 4 trillion) / (6 trillion - 5 trillion) = 0.8

Therefore, if disposable income increases from $5 trillion to $6 trillion, consumption expenditure will increase to $4.8 trillion (not $6 trillion, as in choice B) and the MPC will be 0.8 (not 1.00, as in choice B). Thus, the correct choice is C. Choice A is incorrect because it does not reflect the increase in consumption expenditure due to the increase in disposable income. Choice D is incorrect because it implies an MPC greater than 1, which is not possible.

Suppose Disposable Income Increases from $5 Trillion to $6 Trillion