If spending decreases by $400, and GDP decreases by $1,000 as a result, what must the MPC be?
A) 0.6
B) 0.75
C) 4
D) 2.5

Question

Quizplus · Accepted Answer

The marginal propensity to consume (MPC) can be calculated using the formula for the multiplier effect: Multiplier = 1/(1-MPC). Given that the multiplier is the ratio of the change in GDP to the change in spending, we have 1000/400 = 2.5. Solving 2.5 = 1/(1-MPC) gives MPC = 0.6.

If Spending Decreases by $400, and GDP Decreases by $1,000