{"id":203714,"date":"2025-03-20T13:06:32","date_gmt":"2025-03-20T13:06:32","guid":{"rendered":"https:\/\/learnexams.com\/blog\/?p=203714"},"modified":"2025-03-20T13:17:11","modified_gmt":"2025-03-20T13:17:11","slug":"suppose-that-the-marginal-propensity-to-consume-is-0-8","status":"publish","type":"post","link":"https:\/\/www.learnexams.com\/blog\/2025\/03\/20\/suppose-that-the-marginal-propensity-to-consume-is-0-8\/","title":{"rendered":"Suppose that the marginal propensity to consume is 0.8"},"content":{"rendered":"\n<p>Suppose that the marginal propensity to consume is 0.8. If disposable income increases by $0.5 trillion, by how much will consumption expenditure change?<\/p>\n\n\n\n<p><mark style=\"background-color:rgba(0, 0, 0, 0)\" class=\"has-inline-color has-ast-global-color-6-color\"><strong>The correct answer and explanation is :<\/strong><\/mark><\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Answer:<\/h3>\n\n\n\n<p>The change in consumption expenditure can be calculated using the Marginal Propensity to Consume (MPC) formula:<\/p>\n\n\n\n<p>[<br>\\Delta C = MPC \\times \\Delta Y_d<br>]<\/p>\n\n\n\n<p>Where:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>(\\Delta C) = Change in consumption expenditure<\/li>\n\n\n\n<li>(MPC = 0.8) (Given)<\/li>\n\n\n\n<li>(\\Delta Y_d = 0.5) trillion (Increase in disposable income)<\/li>\n<\/ul>\n\n\n\n<p>Substituting the values:<\/p>\n\n\n\n<p>[<br>\\Delta C = 0.8 \\times 0.5<br>]<\/p>\n\n\n\n<p>[<br>\\Delta C = 0.4 \\text{ trillion}<br>]<\/p>\n\n\n\n<p>Thus, <strong>consumption expenditure will increase by $0.4 trillion.<\/strong><\/p>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<h3 class=\"wp-block-heading\">Explanation:<\/h3>\n\n\n\n<p>The <strong>marginal propensity to consume (MPC)<\/strong> measures the proportion of additional income that a household spends on consumption rather than saving. It is a key concept in Keynesian economics and helps in understanding the relationship between income and consumption.<\/p>\n\n\n\n<p>In this case, the MPC is <strong>0.8<\/strong>, meaning that for every additional dollar of disposable income, <strong>80 cents is spent on consumption<\/strong> while <strong>20 cents is saved<\/strong>.<\/p>\n\n\n\n<p>When disposable income increases by <strong>$0.5 trillion<\/strong>, households allocate <strong>80% of this additional income to consumption<\/strong>. Using the MPC formula, we calculated that consumption expenditure increases by <strong>$0.4 trillion<\/strong>.<\/p>\n\n\n\n<p>This concept is important because it helps in analyzing <strong>multiplier effects<\/strong> in the economy. If MPC is high, it leads to greater increases in aggregate demand, thereby stimulating economic growth. Conversely, if MPC is low, a significant portion of additional income is saved, leading to slower economic expansion.<\/p>\n\n\n\n<p>In practical policy-making, governments use this concept to design <strong>fiscal policies<\/strong> such as tax cuts or stimulus payments. If policymakers aim to boost economic activity, they may target households with a high MPC, ensuring that more of the additional income gets spent rather than saved, thereby increasing overall demand and economic output.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Suppose that the marginal propensity to consume is 0.8. If disposable income increases by $0.5 trillion, by how much will consumption expenditure change? The correct answer and explanation is : Answer: The change in consumption expenditure can be calculated using the Marginal Propensity to Consume (MPC) formula: [\\Delta C = MPC \\times \\Delta Y_d] Where: [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"site-sidebar-layout":"default","site-content-layout":"","ast-site-content-layout":"default","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","ast-disable-related-posts":"","theme-transparent-header-meta":"","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"default","ast-page-background-enabled":"default","ast-page-background-meta":{"desktop":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"ast-content-background-meta":{"desktop":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"footnotes":""},"categories":[25],"tags":[],"class_list":["post-203714","post","type-post","status-publish","format-standard","hentry","category-exams-certification"],"_links":{"self":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/posts\/203714","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/comments?post=203714"}],"version-history":[{"count":0,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/posts\/203714\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/media?parent=203714"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/categories?post=203714"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/tags?post=203714"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}