Use the information below to answer the following questions.
Fact 11.1.1
In an economy, when disposable income increases from $400 billion to $500 billion, consumption expenditure increases from billion to $540 billion.
-Consider Fact 11.1.1.The marginal propensity to consume is
A)0.80.
B)0.75.
C)0.25.
D)0.40.
E)0.60.

Question

Quizplus · Accepted Answer

The marginal propensity to consume (MPC) is the change in consumption expenditure divided by the change in disposable income. Using the information given, the change in consumption expenditure is $540 billion - $500 billion = $40 billion, and the change in disposable income is $500 billion - $400 billion = $100 billion. Therefore, the MPC is $40 billion / $100 billion = 0.4 or 40%. However, the question asks for the MPC as a decimal, so the answer is 0.60 or choice E.

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