Autonomous spending rises by $10 billion and Real GDP rises by $50 billion.What does the marginal propensity to save equal?
A) 0.10
B) 0.20
C) 0.80
D) 0.90
E) 0.50

Question

Quizplus · Accepted Answer

Autonomous spending means that the increase in GDP was not caused by any change in consumption, therefore we can use the equation: ΔY = ΔAutonomous Spending / (1-MPC), where MPC is the marginal propensity to consume.
$10 billion = ΔAutonomous Spending / (1-MPC)
We also know that ΔY = $50 billion, therefore:
$50 billion = MPC * $10 billion
MPC = 0.2

Autonomous Spending Rises by $10 Billion and Real GDP Rises