Scenario 10.1 Imagine an economy that does not have international trade and is originally in equilibrium.Then the government increases the level of spending by $350 million because it received a gift from abroad.In this economy, only 65 cents of every dollar is spent, and the rest is saved.
What is the marginal propensity to consume for the economy described in Scenario 10.1?

Question

Quizplus · Accepted Answer

The marginal propensity to consume (MPC) is the fraction of a change in disposable income that is spent, so it can be calculated as:
MPC = Change in Consumption / Change in Disposable Income
Since 65 cents of every dollar is spent, the MPC is 0.65. The fact that the increase in spending was due to a gift from abroad is not relevant to the calculation of the MPC. Therefore, the correct answer is C.