If spending increased by $200, and the GDP increased $1,000 as a result, the MPC must be:
A) 0.80
B) 0.75
C) 4
D) 5

Question

Quizplus · Accepted Answer

The MPC (marginal propensity to consume) measures the change in consumer spending resulting from a change in income or spending. In this scenario, an increase in spending of $200 resulted in a GDP increase of $1,000. We can use the formula MPC = change in consumption/change in income to solve for the MPC. The change in consumption is $200 (the initial increase in spending), and the change in income is $1,000 (the resulting increase in GDP). MPC = $200/$1,000 = 0.20. However, the MPC measures the ratio of additional consumption to additional income, so we need to subtract the initial increase in spending from the resulting increase in GDP to get the additional income resulting from the initial increase in spending: $1,000 – $200 = $800. Now we can use the formula again to solve for the MPC: MPC = $200/$800 = 0.80. Therefore, the answer is A) 0.80.

If Spending Increased by $200, and the GDP Increased $1,000