When disposable income increases from $400 billion to $500 billion, consumption expenditure increases from $320 billion to $400 trillion. The MPC is
A) $6.8 trillion.
B) 0.60.
C) 1.00.
D) 0.68.
E) 0.80.

Question

Quizplus · Accepted Answer

The marginal propensity to consume (MPC) is calculated as the change in consumption divided by the change in disposable income. Here, the change in consumption is $80 billion ($400 billion - $320 billion) and the change in disposable income is $100 billion ($500 billion - $400 billion). Thus, MPC = $80 billion / $100 billion = 0.80.

When Disposable Income Increases from $400 Billion to $500 Billion