The decrease in lifetime wealth affects consumption demand by
A) $- \mathrm { MPC } \left( \mathrm { G } _ { 2 } - \mathrm { G } _ { 1 } \right)$.
B) $\operatorname { MPC } \left( \mathrm { G } _ { 2 } - \mathrm { G } _ { 1 } \right)$.
C) $( 1 - \mathrm { MPC } ) \left( \mathrm { G } _ { 2 } - \mathrm { G } _ { 1 } \right)$.
D) $r \left( \mathrm { G } _ { 2 } - \mathrm { G } 1 \right)$.
E) does not affect it.

Question

Quizplus · Accepted Answer

The decrease in lifetime wealth affects consumption demand by $- \mathrm { MPC } \left( \mathrm { G } _ { 2 } - \mathrm { G } _ { 1 } \right)$. This is because the Marginal Propensity to Consume (MPC) represents the proportion of an additional unit of wealth that is consumed. If lifetime wealth decreases ($\mathrm { G } _ { 2 } - \mathrm { G } _ { 1 } < 0$), consumption demand decreases proportionally to the MPC.

The Decrease in Lifetime Wealth Affects Consumption Demand by A) −MPC(G2−G1)- \mathrm { MPC } \left( \mathrm { G } _ { 2 } - \mathrm { G } _ { 1 } \right)−MPC(G2​−G1​)

The Decrease in Lifetime Wealth Affects Consumption Demand by
A) $- \mathrm { MPC } \left( \mathrm { G } _ { 2 } - \mathrm { G } _ { 1 } \right)$