If the government decreased its purchases of goods and services by $4,000, and this resulted in an eventual decrease in GDP and income of $10,000, the MPC would be equal to
A) 2.5.
B) 1.5.
C) 0.6.
D) 0.4.

Question

Quizplus · Accepted Answer

The marginal propensity to consume (MPC) is calculated as the change in consumption divided by the change in income. Here, a $4,000 decrease in government spending led to a $10,000 decrease in GDP (and thus income), indicating that every dollar decrease in spending resulted in a $2.5 decrease in GDP. The MPC is found using the formula for the spending multiplier: 1/(1-MPC) = Change in GDP / Change in spending. Solving for MPC gives us 0.6.

If the Government Decreased Its Purchases of Goods and Services