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Assumption about the Range of the Marginal Propensity to Consume (MPC)
A standard assumption in macroeconomic models is that the marginal propensity to consume (MPC) is positive but less than one (i.e., $0 < MPC < 1$). This implies that when households receive additional income, they will consume a portion of it and save the rest. Therefore, consumption increases, but not by the full amount of the income increase.
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Introduction to Macroeconomics Course
Ch.3 Aggregate demand and the multiplier model - The Economy 2.0 Macroeconomics @ CORE Econ
The Economy 2.0 Macroeconomics @ CORE Econ
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Graphical Interpretation of the Marginal Propensity to Consume (MPC)
Assumption about the Range of the Marginal Propensity to Consume (MPC)
Example of a Marginal Propensity to Consume (MPC) of 0.6
An economy experiences a $200 billion increase in aggregate disposable income. As a result, aggregate consumption spending rises from $800 billion to $950 billion. Based on this information, what is the marginal propensity to consume (MPC) for this economy?
Two households, the Smith family and the Jones family, each receive an unexpected one-time bonus of $1,000. The Smith family's marginal propensity to consume is 0.9, while the Jones family's is 0.6. Which statement best analyzes the immediate effect of this bonus on their spending?
Economic Stimulus Policy Evaluation
A household earns a disposable income of $60,000 per year and spends $45,000 on consumption. Based on this information, the household's marginal propensity to consume is 0.75.
Calculating Change in Consumption
An unexpected, one-time government payment is distributed to all citizens. Which of the following individuals is most likely to have the highest marginal propensity to consume with respect to this payment?
Evaluating Economic Stimulus Policies
Consider two economies, A and B, with the following aggregate consumption functions where C is consumption and Yd is disposable income (both in billions of dollars):
- Economy A: C = 200 + 0.8Yd
- Economy B: C = 500 + 0.5Yd
If both economies experience an identical $100 billion increase in aggregate disposable income, which statement accurately compares the resulting change in consumption?
An economic report observes that for every additional dollar of disposable income households receive, they tend to increase their savings by $0.25. Based on this information, what is the implied marginal propensity to consume (MPC)?
Formulating an Aggregate Consumption Function
Aggregate MPC as an Average
Determinants of the Marginal Propensity to Consume
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Allocation of Additional Income between Consumption and Saving
Multiplier Value Greater Than One
An economy experiences a sudden, one-time increase in aggregate income. According to the core behavioral assumptions that form the basis for how initial spending changes get magnified throughout the economy, which of the following outcomes is the most plausible description of how households, in aggregate, will react?
Evaluating Economic Assumptions
If an economic model is built on the assumption that for every additional dollar of income households receive, their consumption spending increases by $1.05, this assumption is consistent with the standard behavioral framework used to explain how initial changes in spending can have a larger final impact on the economy.
The Foundation of Economic Magnification
Analyzing an Economic Anomaly
Evaluating a Core Behavioral Assumption in Economics
An economic model describes how households respond to changes in their income. Match each described household behavior with the corresponding value for the proportion of additional income they spend.
In an economic model where one person's spending becomes another person's income, an initial injection of spending will lead to a series of subsequent spending rounds. For the total economic impact of this initial injection to be larger than the initial amount but still a finite number, the fraction of any additional income that people spend must be a value greater than zero and strictly less than ____.
In a simplified economic model, it is assumed that when households receive additional income, they spend a portion of it, which in turn becomes income for others, leading to subsequent rounds of spending. If a model were to assume that households, in aggregate, consistently spend more than 100% of any additional income they receive, what would be the logical consequence for the economy following an initial injection of new spending?
Evaluating an Economic Forecast