If an increase in autonomous consumption spending of $10 million results in a $50 million increase in equilibrium real GDP,then
A)the MPC is 0.5.
B)the MPC is 0.75.
C)the MPC is 0.8.
D)the MPC is 0.9.

Question

Quizplus · Accepted Answer

The multiplier effect is calculated as 1/(1-MPC), and the increase in equilibrium real GDP ($50 million) divided by the increase in autonomous consumption spending ($10 million) gives us the multiplier, which is 5 in this case. Solving the equation 1/(1-MPC) = 5 for MPC gives us 0.8, indicating that the marginal propensity to consume (MPC) is 0.8.

If an Increase in Autonomous Consumption Spending of $10 Million