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If aggregate expenditure (ae) is 600 when income is 610, what is the marginal propensity to consume?

Sagot :

The Marginal propensity to consume is 0.5

Consumption function: C = a + MPC * Yd

Where 'a' is the autonomous consumption (i.e., consumption at zero level of income)

MPC is the marginal propensity to consume.

Yd is the disposable income.

=> Yd = Y - T

So, C = 200 + MPC*Yd

=> C = 200 + MPC *(Y - T)

------------------------------------

AE = C + I + G + NX

=> AE = 200 + MPC *(Y - T) + 20 + 100 + 0

=> AE = 320 + MPC* (Y-50)

At Y = 610, AE is 600

=> 600 = 320 + MPC *(610 - 50)

=> 600 -320 = MPC * (560)

=> 280 = MPC * (560)

=> MPC = (280 / 560)

=> MPC = 0.5

Marginal propensity to consume measures how much consumers will spend or save against an overall increase in wages. In other words, if a person received an increase in income, what percentage of that new income would he spend.

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