A country’s aggregate consumption was ?20 million when its GDP was ?100 million. Following an
A country’s aggregate consumption was ?20 million when its GDP was ?100 million. Following an increase in GDP to ?120million, consumption increased to ?25million. The marginal propensity to consume is given as
- A) 0.25
- B) 0.50
- C) 0.75
- D) 0.80
Correct Answer: A) 0.25
Explanation
The marginal propensity to consume (MPC) is the proportion of an increase in income that gets spent on consumption. To calculate MPC, you need to find the change in consumption divided by the change in GDP.
Initially, the country's aggregate consumption was ?20 million, and its GDP was ?100 million. After the increase, consumption became ?25 million, and GDP increased to ?120 million.
Change in consumption = New consumption - Initial consumption Change in consumption = ?25 million - ?20 million Change in consumption = ?5 million
Change in GDP = New GDP - Initial GDP Change in GDP = ?120 million - ?100 million Change in GDP = ?20 million
Now, calculate the MPC:
MPC = Change in consumption / Change in GDP MPC = ?5 million / ?20 million MPC = 0.25
The correct answer is Option A: 0.25. This means that for each additional ?1 in GDP, consumption increases by ?0.25.