If spending increased by $250, and the GDP decreased $1,000 as a result, the MPC must be:
A) −0.75
B) 0.75
C) −4
D) 2

Question

Quizplus · Accepted Answer

The MPC (marginal propensity to consume) refers to the change in consumer spending as a result of a change in income. If spending increased by $250, we can assume that income increased as well. The formula for calculating the MPC is:

MPC = change in consumption / change in income

We don't know the exact change in income, but we do know that the overall effect on the economy was a decrease in GDP. This means that the increase in spending was not enough to offset the decrease in other economic factors, leading to a net decrease in output.

If we assume a simple Keynesian model with no other complicating factors, we can calculate the MPC as follows:

MPC = (change in consumption) / (increase in income) = ($250) / (-$1000) = -0.25

However, we cannot directly compare the change in consumption to the change in GDP, since other factors such as government spending, net exports, and investment also affect GDP. Therefore, we cannot definitively calculate the MPC given only the information in the question.

However, we can eliminate choices A, C, and D as they do not make sense. A negative MPC would mean that an increase in income leads to a decrease in consumption, which is counterintuitive. A value of -4 or 2 is also unlikely given typical values for the MPC in the range of 0 to 1. Therefore, the best answer is B, indicating a positive MPC that is less than 1.

If Spending Increased by $250, and the GDP Decreased $1,000