Economics • Economic BasicsHard
In macroeconomic theory, how is the 'Marginal Propensity to Consume' (MPC) formally defined?
A. The ratio of total consumption expenditure to total disposable income
B. The proportion of an aggregate wage increase paid out as direct taxes
C. The fraction of an additional unit of disposable income that is spent on consumption✓ Correct Answer
D. The total savings accumulated by households divided by national income
💡 Solution & Explanation
Marginal propensity to consume measures the proportion of aggregate income growth that is spent on consumption rather than saved. The ratio of total consumption to total income represents the average propensity to consume. Keynesian economics utilizes the marginal propensity to consume to calculate the multiplier effect, determining how initial changes in investment generate broader economic output changes. Higher marginal propensity to consume values result in larger multiplier impacts across the economy.
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