Question

Suppose that national income in a country is $300 billion, taxes paid by households is $130 billion, household consumption is $180 billion, and the marginal propensity to consume (MPC) is 0.7.
On the following graph, use the blue line (circle symbol) to plot the economy’s consumption function.
Suppose now that country's national income increases to $350 billion. Assuming the amount paid in taxes is fixed at $130 billion and that MPC = 0.7, what will be the new household consumption?
$249.3 billion
$215 billion
$180 billion
$250.7 billion

Answer 1

Answer:

$180 billion

Explanation:

The consumption is an act of spending the money from an income. The marginal propensity to consume is the proportion increase in the amount that a consumer is spending. The savings then decline if the consumption increases. In the given scenario the consumption will not raise even if there is an increase in national income and taxes are kept fixed at previous level. This is because marginal propensity to consume is same.