If spending increases by $200, and GDP increases by $1,000 as a result, what must the MPC be?
A) 0.80
B) 0.75
C) 4
D) 5

Question

Quizplus · Accepted Answer

The MPC (marginal propensity to consume) is the increase in consumer spending that results from a one unit increase in disposable income. In this scenario, we are told that a $200 increase in spending led to a $1,000 increase in GDP. This means that the multiplier is 5 ($1,000/$200). The multiplier is calculated as 1/(1-MPC). Solving for MPC, we get MPC = 0.80. Therefore, choice A is the correct answer.

If Spending Increases by $200, and GDP Increases by $1,000