MICS TO2: Macroeconomics James has a marginal propensity to consume of 0.75. What does this mean? 25 cents of every additional dollar of his income is spent on consumption. 75 cents of every additional dollar of his income is saved. He's spending more than he's making 75 cents of every additional dollar of in income. his income is spent on consumption. I don't know Continue
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Step 1: The marginal propensity to consume (MPC) is the fraction of an additional dollar of income that is spent on consumption. Show more…
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Suppose that throughout the U.S. economy, individuals spend $$90 \%$$ of every additional dollar that they earn. Economists would say that an individual's marginal propensity to consume is 0.90 . For example, if Jane earns an additional dollar, she will spend $$0.9(1)=\$ 0.90$$ of it. The individual who earns $$\$ 0.90$$ (from Jane) will spend $$90 \%$$ of it, or $$\$ 0.81$$. This process of spending continues and results in an infinite geometric series as follows: $$1,0.90,0.90^{2}, 0.90^{3}, 0.90^{4}, \ldots$$
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Consider a hypothetical closed economy in which households spend $0.65 of each additional dollar they earn and save the remaining $0.35. The marginal propensity to consume (MPC) for this economy is 0.65, and the multiplier for this economy is 1.54.
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Choose the correct answer: 1) If consumption is $25,000 when income is $26,000, and consumption increases to $25,900 when income increases to $28,000, the marginal propensity to consume is: (A) 0.59. (B) 0.65. (C) 0.55. (D) 0.45. 2) Suppose consumption is $10,000 when income is $9,000 and the marginal propensity to save equals 0.1. When income increases to $9,500, consumption will be: (A) $8,500. (B) $10,450. (C) $10,500. (D) $10,050.
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