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777dan777 [17]
3 years ago
15

Consider a hypothetical closed economy in which households spend $0.60 of each additional dollar they earn and save the remainin

g $0.40.The marginal propensity to consume (MPC) for this economy is ???, and the spending multiplier for this economy is ???.
Business
1 answer:
Liono4ka [1.6K]3 years ago
8 0

Answer: Marginal propensity to consume = $0.60

              Spending multiplier = $2.5

Explanation: The MPC can be calculated using following equation :-

MPC=\frac{change\:in\:consumption}{change\:in\:spending}

MPC=\frac{\$0.60}{\$1}

               = 0.60

Similarly, we can calculate spending multiplier as :-

Spending\:multiplier\:=\:\frac{1}{1-MPC}

Spending\:multiplier\:=\:\frac{1}{1-0.60}

                                            = $2.5

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A monopolistic competitive firm has a downward sloping demand curve just like a monopoly, so the monpolistically competitive firm chooses the quantity that maximises its profit and then chooses price.

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