Question

Assume that consumption in the United States is $9,000 billion in 2007. If the MPC is 0.8 and the disposable income increases by $1,000 billion in 2008, then the level of consumption in 2008 will be:

Answer 1

Answer:

$9,800

Explanation:

MPC is marginal propensity to consume which is computed by dividing change in consumption by change in disposable income.

Given:

Consumption in 2007 = $9,000 billion

MPC = 0.8

Increase in disposable income = $1,000 billion

MPC = Change in consumption / change in disposable income

Change in consumption = Change in disposable income × MPC

                                         = 1,000 × 0.8

                                         = $800 billion

If disposable income increase by $1,000 billion, consumption will increase by $800 billion. So consumption level in 2008 is $9,800 billion (9,000 + 800)