If the government decreased its spending by $250,and the GDP decreased $1,000 as a result,the MPC must be:

Question

Quizplus · Accepted Answer

The MPC (Marginal Propensity to Consume) is the ratio of the change in consumption to the change in disposable income. In this scenario, we can use the expenditure multiplier formula to find the MPC:

Expenditure Multiplier = 1 / (1 - MPC)
-1000 = 1 / (1 - MPC) * -250
4 = 1 - MPC
MPC = 1 - 4
MPC = -3

Since the MPC cannot be negative, we need to take the absolute value, which gives us MPC = 3. However, we know from economic theory that MPC + MPS (Marginal Propensity to Save) = 1, so:

MPS = 1 - MPC
MPS = 1 - 3
MPS = -2

Again, since the MPS cannot be negative, we need to take the absolute value, which gives us MPS = 2. Therefore, the answer is B) 0.75, which is the reciprocal of 1.33 (1 divided by 1 + MPC), and represents the fraction of each additional dollar of disposable income that is spent, on average.

If the Government Decreased Its Spending by $250,and the GDP