Suppose disposable income increases from $11 trillion to $12 trillion. At the same time, consumption expenditure increases from $4.2 trillion to__________ . Thus the MPC must equal__________

Question

Quizplus · Accepted Answer

To find the change in consumption expenditure, we need to use the formula for the consumption function: 
C = a + MPC(Y) 
where a is autonomous consumption and Y is disposable income.

We are given that disposable income increases from $11 trillion to $12 trillion, so the change in income is $1 trillion. We can use this to find the MPC:

MPC = Change in consumption expenditure / Change in income

MPC = (C2 - C1) / (Y2 - Y1)

MPC = ($5.0 trillion - $4.2 trillion) / ($12 trillion - $11 trillion)

MPC = $0.8 trillion / $1 trillion

MPC = 0.8

Now we can use the MPC to find the new consumption expenditure:

C2 = a + MPC(Y2)

We are not given a value for autonomous consumption, but we don't need it to answer the question. We just need to find the change in consumption expenditure, which is:

Change in consumption expenditure = MPC x Change in income

Change in consumption expenditure = 0.8 x $1 trillion

Change in consumption expenditure = $0.8 trillion

So the new consumption expenditure is:

C2 = $4.2 trillion + $0.8 trillion = $5.0 trillion

Therefore, the answer is C: $5.0 trillion; 0.80.

Suppose Disposable Income Increases from $11 Trillion to $12 Trillion