If the marginal propensity to consume is equal to .8, the tax rate is equal to .2, and the marginal propensity to import is .1, the marginal propensity to expend will equal
A) .5.
B) .54.
C) .74.
D) .26.

Question

Quizplus · Accepted Answer

The marginal propensity to expend can be calculated as 1 - (marginal propensity to save + marginal propensity to tax + marginal propensity to import). Given a marginal propensity to consume (MPC) of .8, the marginal propensity to save (MPS) is 1 - MPC = .2. With a tax rate of .2 and a marginal propensity to import of .1, the formula becomes 1 - (.2 + .2 + .1) = .5. However, the correct calculation for the marginal propensity to expend involves adjusting the MPC by the factors of taxation and imports, not by adding MPS, tax rate, and MPI directly. The correct approach is to adjust the MPC by the factors that reduce disposable income and spending power, leading to the correct answer through a more nuanced calculation that accounts for how taxes and imports reduce the effective spending out of an additional dollar earned.

If the Marginal Propensity to Consume Is Equal to