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A government increases taxes by $200 million, which leads to a decrease in consu

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Question: A government increases taxes by $200 million, which leads to a decrease in consumer spending by $300 million. What is the marginal propensity to consume?

Options:

  1. 0.5
  2. 0.67
  3. 0.75
  4. 0.33

Correct Answer: 0.67

Solution: 

Marginal propensity to consume = Change in consumption / Change in income = 300 / 200 = 1.5

A government increases taxes by $200 million, which leads to a decrease in consu

Practice Questions

Q1
A government increases taxes by $200 million, which leads to a decrease in consumer spending by $300 million. What is the marginal propensity to consume?
  1. 0.5
  2. 0.67
  3. 0.75
  4. 0.33

Questions & Step-by-Step Solutions

A government increases taxes by $200 million, which leads to a decrease in consumer spending by $300 million. What is the marginal propensity to consume?
  • Step 1: Understand the problem. We have a tax increase of $200 million and a decrease in consumer spending of $300 million.
  • Step 2: Identify the formula for marginal propensity to consume (MPC). The formula is: MPC = Change in consumption / Change in income.
  • Step 3: Determine the change in consumption. In this case, the change in consumption is -$300 million (since it's a decrease).
  • Step 4: Determine the change in income. The change in income is -$200 million (since taxes are an income decrease).
  • Step 5: Plug the values into the formula. MPC = -300 / -200.
  • Step 6: Simplify the fraction. -300 divided by -200 equals 1.5.
  • Step 7: Conclude that the marginal propensity to consume is 1.5.
  • Marginal Propensity to Consume (MPC) – The marginal propensity to consume is the ratio of the change in consumption to the change in income, indicating how much consumption changes with a change in income.
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