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Marginal Propensity to Consume (MPC)
The marginal propensity to consume (MPC) is the change in consumption that results from a one-unit change in disposable income. It quantifies the effect of an additional unit of income on consumption. In the aggregate consumption function, , the MPC is represented by the parameter .
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Marginal Propensity to Consume (MPC)
Graphical Representation of Autonomous Consumption
Autonomous Consumption (c₀)
An economy's spending behavior is described by the equation C = 200 + 0.75Y, where C is total consumption and Y is total income. If the total income in this economy is 1,000, what is the total aggregate consumption?
An economy's aggregate consumption is described by the equation C = 300 + 0.7Y, where C is total consumption and Y is total income. If total income in this economy increases by $1,000, what is the source of the corresponding increase in total consumption?
Analyzing Shifts in Consumption Behavior
Deriving the Consumption Function from Economic Data
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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