Question

At an initial point on the aggregate demand curve, the price level is 100, and real GDP is $18 trillion. After the price level rises to 110, however, there is an upward movement along the aggregate demand curve, and real GDP declines to $14 trillion. If total planned spending declined by $200 billion in response to the increase in the price level, what is the marginal propensity to consume in this economy?

Answer 1

Answer:

MPC = 0.05

Explanation:

Marginal Propensity to Consume (MPC) is defined as the proportion of an aggregate raise in pay that a consumer spends on goods and services rather than saving .

Here, since the spending is declined by $200 billion, it shows that consumption (C) is also reduced by $200 billion.

The aggregate income (Y) is declined by: ($18 - $14) trillion = $4 trillion

MPC is calculated as follows;

MPC = dC/dY

= $200 billion/$4 trillion

= 0.2/4

= 0.05