A rise in the marginal propensity to consume will:
(i) lower the slope of the consumption function.
(ii) increase the slope of the consumption function.
(iii) increase the level of equilibrium GDP.
(iv) shift the aggregate expenditure function upward.
A)(i) and (ii)
B)(ii) and (iii)
C)(i) and (iv)
D)(ii) and (iv)

Question

Quizplus · Accepted Answer

The marginal propensity to consume (MPC) is the fraction of an additional unit of income that is spent on consumption. An increase in MPC means that a larger proportion of income will be spent on consumption, and this will lead to an increase in the slope of the consumption function. This is because a higher MPC implies that for any given level of income, there will be a larger level of consumption.

Since an increase in MPC leads to an increase in consumption, it will also have a positive impact on equilibrium GDP. This is because an increase in consumption will lead to an increase in aggregate expenditure and therefore lead to an increase in GDP. As a result, an increase in MPC will lead to an upward shift in the aggregate expenditure function.

Therefore, the correct answer is (B) (ii) and (iii).

A Rise in the Marginal Propensity to Consume Will