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Category - Economics

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Economists state that government purchases have a multiplier effect on aggregate demand. In other words, every dollar spent by the government leads to an increase in aggregate demand for goods and services by a dollar or more. According to the multiplier equation below, what does MPC stand for?
Multiplier = 1/(1 - MPC)
  1. marginal propensity to consume
  2. medium proportion to consumption
  3. marginal proportion to consumption
  4. medium propensity to consume
Explanation
Answer: A - MPC stands for Marginal Propensity to Consume.

Key Takeaway: Marginal Propensity to Consume or MPC is a proportion of an individual/family’s disposable income that is consumed rather than saved. An increase in income leads to an increase in disposable income and an increase in MPC.
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