Marginal Propensity to Consume Quiz

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Questions and Answers

What were the initial values used for consumption (C) and marginal propensity to consume (MPC)?

Consumption (C) = 50, MPC = 0.5

What is the formula for Marginal Propensity to Consume (MPC)?

MPC = ΔC / ΔY

The Marginal Propensity to Consume (MPC) means that for every additional unit of income earned, consumers spend _____ units on consumption.

0.5

What is the value of Autonomous Investment (B) used in the calculation?

<p>0.8</p> Signup and view all the answers

What was the change in consumption (ΔC) calculated in the example?

<p>25</p> Signup and view all the answers

What is the change in income (ΔY) used to calculate MPC?

<p>50</p> Signup and view all the answers

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Study Notes

Marginal Propensity to Consume (MPC)

  • The MPC represents the change in consumption spending for each change in income.
  • The formula for calculating MPC is: MPC = (Change in Consumption) / (Change in Income).
  • In the example provided, the MPC is 0.5. This means that for every additional unit of income earned, consumers spend 0.5 units on consumption.
  • The calculation of MPC uses the following values:
    • Autonomous investment of 106
    • Consumption (C) of 50
    • Autonomous Investment (B) of 0.8
  • The calculation is performed as follows: MPC = (75 - 50) / (100 - 50) = 25 / 50 = 0.5

Key Assumptions

  • The text assumes a specific amount of autonomous investment (106) and consumption (50).
  • It also assumes a particular value for autonomous investment (B), which is 0.8.

Interpretation

  • The MPC of 0.5 indicates that consumers will spend half of any additional income they earn, contributing to the overall economic activity.
  • A higher MPC implies a stronger relationship between income and consumption.
  • A lower MPC might indicate that individuals are saving more or spending their additional income on other goods and services.
  • The MPC is a crucial concept in understanding the multiplier effect and economic growth.

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