Suppose equilibrium real GDP demanded rises from $4 trillion to $6 trillion when government purchases increase by $1 trillion.What is the marginal propensity to consume?

Question

Quizplus · Accepted Answer

We can use the formula for the expenditure multiplier:

ΔY/ΔG = 1/(1-MPC)

where ΔY is the change in real GDP, ΔG is the change in government purchases, and MPC is the marginal propensity to consume.

Plugging in the values given, we get:

(6-4)/1 = 1/(1-MPC)

2 = 1/(1-MPC)

1-MPC = 1/2

MPC = 1/2 = 0.5

Therefore, the answer is B, and the marginal propensity to consume is 0.5.

Suppose Equilibrium Real GDP Demanded Rises from $4 Trillion to $6