Question

If the MPC is 0.5, then a $10 million increase in disposable income will increase consumption by A) $2 million. B) $5 million. C) $15 million D) $50 million.

Answer 1

Answer:

The correct answer is letter "B": $5 million.

Explanation:

Marginal Propensity to Consume (MPC) is a measure of how much consumption changes when income changes. MPC is calculated by dividing the change in consumption by the change in disposable income. Disposable income is the money households have available after deducting their expenses and taxes.

Thus, in the example:

$MPC = \frac{Change in consumption}{Change in disposable income}$

$0.5 = \frac{Change in consumption}{10,000,000}$

5,000,000 = Change in consumption

Then, the change in consumption is $5 million.