Suppose the value of the marginal propensity to consume (MPC) in a closed economy is 0.75, autonomous consumption is £300 and national output is 1500. If the tax rate is 8%, what is the level of consumption in the economy?
A) £1035
B) £1335
C) £1380
D) £465

Question

Quizplus · Accepted Answer

The consumption function is C = C₀ + MPC * (Y - T), where C₀ is autonomous consumption, Y is national output, and T is taxes. Taxes are 8% of 1500, so T = 0.08 * 1500 = £120. Therefore, C = 300 + 0.75 * (1500 - 120) = 300 + 0.75 * 1380 = 300 + 1035 = £1335.

Suppose the Value of the Marginal Propensity to Consume (MPC)