If an increase in autonomous consumption spending of $25 million results in a $100 million increase in equilibrium real GDP, then
A)the MPC is 0.25.
B)the MPC is 0.75.
C)the MPC is 0.8.
D)the MPC is 0.9.
E)the MPC is 2.5.

Question

Quizplus · Accepted Answer

The marginal propensity to consume (MPC) is calculated using the multiplier effect formula, which is 1/(1-MPC). Given that a $25 million increase in autonomous consumption spending leads to a $100 million increase in equilibrium real GDP, the multiplier is 4 ($100 million / $25 million). Solving the equation 1/(1-MPC) = 4 for MPC gives us 0.75.

If an Increase in Autonomous Consumption Spending of $25 Million