If we know that the slope of the consumption function is 0.6,then we know that if real disposable income increased by $1,000 billion,real consumption spending would
A) increase by $60 billion
B) increase by $1,000 billion
C) increase by $600 billion
D) increase by $6,000 billion
E) decrease by $6 billion

Question

Quizplus · Accepted Answer

The slope of the consumption function is the marginal propensity to consume (MPC). In this case, the MPC is 0.6. Therefore, if real disposable income increases by $1,000 billion, real consumption spending would increase by 0.6 * $1,000 billion = $600 billion. Option A is incorrect because $60 billion is only 6% (0.6) of $1,000 billion. Option B is incorrect because it assumes a 100% MPC, which is not realistic. Option D is incorrect because it implies a much higher MPC than the given 0.6. Option E is incorrect because it implies a negative MPC, which is impossible - consumption spending always increases with income, even if the MPC is less than 1.

If We Know That the Slope of the Consumption Function