If an increase in autonomous consumption spending of $25 million results in a $100 million increase in equilibrium real GDP,then
A)the MPC is 0.25.
B)the MPC is 0.75.
C)the MPC is 0.8.
D)the MPC is 2.5.

Question

Quizplus · Accepted Answer

The MPC (marginal propensity to consume) is equal to the change in consumption spending divided by the change in income. In this case, the increase in GDP of $100 million can be attributed to the initial increase in consumption spending of $25 million, indicating that the MPC is 0.25. However, since the question is asking for the MPC in terms of the increase in autonomous consumption, we need to consider the multiplier effect. The multiplier, which in this case is equal to 4 ($100 million increase in GDP divided by $25 million increase in autonomous consumption spending), indicates that for every additional dollar of autonomous consumption spending, real GDP will increase by $4. Therefore, the MPC must be equal to 0.75 (1 - (1/4)) in order for the initial $25 million increase in autonomous consumption to result in a $100 million increase in equilibrium GDP.

If an Increase in Autonomous Consumption Spending of $25 Million