A $10.00 change in the value of stocks changes consumption and investment by about
A) $11.00.
B) $10.00.
C) $1.00.
D) $0.40.

Question

Quizplus · Accepted Answer

The marginal propensity to consume (MPC) and marginal propensity to invest (MPI) are both less than 1, meaning that a change in the value of stocks would not have a one-to-one effect on consumption and investment. The actual values of MPC and MPI vary, but typically they are around 0.8 and 0.2, respectively. Therefore, a $10.00 change in the value of stocks would change consumption by about $8.00 (0.8 x $10.00) and investment by about $2.00 (0.2 x $10.00), for a total change of $10.00. This means that the answer is D, $0.40, as a $10.00 change in the value of stocks would only change consumption and investment by $0.80 and $0.20, respectively.

A $1000 Change in the Value of Stocks Changes Consumption and and Investment