Question : The marginal propensity to consume (MPC) is defined as the:
Option 1: Proportion of income that is saved
Option 2: Proportion of income that is consumed
Option 3: Proportion of income that is taxed
Option 4: Proportion of income that is invested
Correct Answer:
Proportion of income that is consumed
Solution : The correct answer is (b) the proportion of income that is consumed. It represents the change in consumption resulting from a change in income. In other words, it measures how much of an additional unit of income is spent on consumption. For example, if the MPC is 0.8, it means that for every additional dollar of income, 80 cents will be spent on consumption.
The MPC is an important concept in Keynesian economics and is used to analyze the relationship between changes in income and changes in consumption. It is also related to the multiplier effect, as the higher the MPC, the larger the multiplier and the greater the overall impact on aggregate demand and economic activity.
