By assuming that marginal propensity to consume is 0.8 and potential output is $800 billion. if the actual real GDP is $700 billion, <u>Increase government spending by $20 billion</u> policy would bring the economy to potential output.
Marginal Propensity to Consume (MPC) is calculated using the formula MPC = C/Y, which divides consumption change by income change.
You must first determine the change in income and the ensuing change in spending in order to perform this calculation (consumption).
The computation would go as follows if a person's income rose by $5,000 and their expenses rose by $4,500:
MPC = 4,500/5,000. MPC equals.9, or 90%
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