Assume the economy is closed and there is no government. The aggregate demand components are described below:C = 100 + 0.6Y (1)I = 200 (2)Now there is a boost in investment, and total investment is not 300. What is the marginal propensity to consume?
Question
Assume the economy is closed and there is no government. The aggregate demand components are described below:C = 100 + 0.6Y (1)I = 200 (2)Now there is a boost in investment, and total investment is not 300. What is the marginal propensity to consume?
Solution
The marginal propensity to consume (MPC) is the increase in consumer spending due to an increase in income. This can be calculated from the consumption function, which in this case is C = 100 + 0.6Y.
The MPC is given by the coefficient of Y in the consumption function. Therefore, in this case, the marginal propensity to consume is 0.6.
This means that for every additional unit of income, consumption will increase by 0.6 units. The increase in investment does not affect the marginal propensity to consume as it is derived solely from the consumption function.
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