Assume total output has increased by $80 billion and nonincome-determined spending has increased by $10 billion, what is the percentage of income that is spent?
A) 80.0%.
B) 85.0%.
C) 87.5%.
D) 92.5%.

Question

Quizplus · Accepted Answer

The marginal propensity to consume (MPC) can be calculated using the formula MPC = Change in Consumption / Change in Income. Here, the increase in total output (income) is $80 billion, and the increase in spending (consumption) is $10 billion. The MPC is thus $10 billion / $80 billion = 0.125. Since the question asks for the percentage of income that is spent, we need to find the marginal propensity to spend, which is 1 - MPC = 1 - 0.125 = 0.875 or 87.5%.

Assume Total Output Has Increased by $80 Billion and Nonincome-Determined