ECONOMICS
AGGREGATE DEMAND
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Increase in consumption per extra unit of income
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decrease in wealth per extra unit of income
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increase in spending per extra unit of income gained
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increase in utility per extra unit of consumption
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Detailed explanation-1: -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.
Detailed explanation-2: -In an economy MPC is 0.75. If investment expenditure increases by 500 crores, calculate total increase in income and consumption expenditure. Total increase in income = Increase in investment x K = 500 x 4 = 2, 000 crores. Total increase in consumption expenditure = 0.75 of 2, 000 = 1, 500 crores.
Detailed explanation-3: -The correct answer is rate of change of consumption as income changes. Marginal propensity to consume refers to the change in consumption with respect to the change in income.
Detailed explanation-4: -The value of MPC cannot be greater than one. MPC is the ratio of additional consumption to additional income (CY). Since additional consumption (C) is only a part of the additional income and cannot be greater than the additional income itself, (Y), (CY) cannot be greater than one.