Determining Marginal Propensity to Consume (MPC)

How can we calculate the Marginal Propensity to Consume (MPC) given an increase in autonomous consumption spending?

Given an increase in autonomous consumption spending of $10 million resulting in a $50 million increase in equilibrium real GDP, what is the MPC?

Calculating the Marginal Propensity to Consume (MPC)

To determine the Marginal Propensity to Consume (MPC) in this scenario, we can use the multiplier formula. The multiplier represents the change in equilibrium real GDP resulting from a change in autonomous spending.

The formula for the multiplier is:

Multiplier = 1 / (1 - MPC)

Given that an increase in autonomous consumption spending of $10 million leads to a $50 million increase in equilibrium real GDP, we can set up the equation as follows:

Multiplier = $50 million / $10 million

Multiplier = 5

Using the multiplier formula, we can solve for the MPC:

5 = 1 / (1 - MPC)

To isolate MPC, we can take the reciprocal of both sides:

1 / 5 = 1 - MPC

Subtracting 1 from both sides, we have:

MPC = 1 - 1/5

MPC = 4/5

MPC = 0.8