If the MPC is 0.95, then a $12 million increase in disposable income will: a. increase consumption by $950 million. b. increase saving by $11.4 million. c. increase saving by $0.6 million. d. increase consumption by $6 million.
Question
If the MPC is 0.95, then a $12 million increase in disposable income will:
a. increase consumption by $950 million.
b. increase saving by $11.4 million.
c. increase saving by $0.6 million.
d. increase consumption by $6 million.
Solution
The correct answer is:
c. increase saving by $0.6 million.
The Marginal Propensity to Consume (MPC) is the increase in consumer spending due to an increase in income. If the MPC is 0.95, this means that for every additional dollar of disposable income, consumers will spend 0.05.
So, if disposable income increases by 0.6 million.
Options a, b, and d are incorrect because they do not correctly apply the MPC to the increase in disposable income.
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