If a $1,000 increase in income leads to an $800 increase in consumption expenditures, then the marginal propensity to consume is
A)0.2 and the multiplier is 1.25.
B)0.8 and the multiplier is 5.
C)0.2 and the multiplier is 5.
D)0.8 and the multiplier is 8.

Question

Quizplus · Accepted Answer

The marginal propensity to consume (MPC) is calculated as the change in consumption divided by the change in income, which is $800/$1000 = 0.8. The multiplier is calculated as 1/(1-MPC), which is 1/(1-0.8) = 5.

If a $1,000 Increase in Income Leads to an $800