ECONOMICS
AGGREGATE DEMAND
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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$40 billion
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$80 billion
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$400 billion
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$320 billion
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Detailed explanation-1: -If the marginal propensity to consume is 0.8, the marginal propensity to save is 8. As interest rates rise, spending decreases. The marginal propensity to consume must always be larger than the marginal propensity to save. If the marginal propensity to consume is 0.5, the marginal propensity to save is 0.5.
Detailed explanation-2: -Use the MPC formula Using the above example, you can divide $3, 500 by $5, 000, which equals 0.7. This means that the consumer in the example spent 70% of every new dollar of disposable income they earned.
Detailed explanation-3: -If the MPC is 0.75, the Keynesian government spending multiplier will be 4/3; that is, an increase of $ 300 billion in government spending will lead to an increase in GDP of $ 400 billion.
Detailed explanation-4: -Understanding Marginal Propensity to Consume (MPC) The marginal propensity to consume is equal to C / Y, where C is the change in consumption, and Y is the change in income. If consumption increases by 80 cents for each additional dollar of income, then MPC is equal to 0.8 / 1 = 0.8.