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Praxis II: Economics Content Knowledge Exam Prep

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 or family’s disposable income that is consumed rather than saved. An increase in income leads to an increase in disposable income and, therefore, an increase in MPC.
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