If a $1,000 increase in income leads to an $800 increase in consumption expenditures, then the marginal propensity to consume is

Question

a.

0.8 and the multiplier is 8.
b.

0.2 and the multiplier is 5.
c.

0.2 and the multiplier is 1.25.
d.

0.8 and the multiplier is 5.

Answer 1

To calculate the marginal propensity to consume (MPC) and the multiplier, we can use the following formulas:

1. Marginal Propensity to Consume (MPC): \[ \text{MPC} = \frac{\Delta C}{\Delta Y} \] Where \(\Delta C\) is the change in consumption and \(\Delta Y\) is the change in income.

   Here, \(\Delta C = 800\) and \(\Delta Y = 1000\). Therefore: \[ \text{MPC} = \frac{800}{1000} = 0.8 \]

2. Multiplier (k): \[ k = \frac{1}{1 - \text{MPC}} \] Substituting the calculated MPC into the formula: \[ k = \frac{1}{1 - 0.8} = \frac{1}{0.2} = 5 \]

Based on these calculations, the marginal propensity to consume is 0.8 and the multiplier is 5.

Thus, the correct answer is:

d. 0.8 and the multiplier is 5.