If the marginal propensity to consume is 0.8, how much will GDP change when consumption increases by $7.5 billion?
A)$37.5 billion
B)$7.5 billion
C)$15 billion
D)$6 billion

Question

Quizplus · Accepted Answer

The marginal propensity to consume (MPC) is the proportion of an additional income that a consumer spends on goods rather than saving it. If the MPC is 0.8, it means that for every additional dollar earned, the consumer will spend 80 cents. To find the total change in GDP from a $7.5 billion increase in consumption, you divide the increase in consumption by the MPC: $7.5 billion / 0.2 (since 1 - MPC = 0.2, the marginal propensity to save) = $37.5 billion. This is because the multiplier effect (1/(1-MPC)) amplifies the initial increase in consumption throughout the economy.

If the Marginal Propensity to Consume Is 0