In a simple, closed economy (no government or foreign sector), income decreases from $6,000 to $4,000. If consumption decreases from $4,500 to $3,000, the marginal propensity to consume is:
A)−0.75.
B)−0.75
C)−0.20.
D)−0.20
E)0.75
F)0.75.
G)1.
H)1

Question

Quizplus · Accepted Answer

The marginal propensity to consume (MPC) is calculated as the change in consumption divided by the change in income. Here, the change in consumption is $3,000 - $4,500 = -$1,500, and the change in income is $4,000 - $6,000 = -$2,000. Thus, MPC = -$1,500 / -$2,000 = 0.75.

In a Simple, Closed Economy (No Government or Foreign Sector)