What does the marginal propensity to consume describe?

What does the marginal propensity to consume describe?

• A. The decrease in consumer spending when income rises by $1.
• B. The total savings when income rises by $1.
• C. The increase in government spending when income rises by $1.
• D. The increase in consumer spending when income rises by $1.

Answer: (D)

MPC describes how much of an extra dollar of income people choose to spend. It’s the change in consumption divided by the change in income, so when income rises by one dollar, the amount that consumption increases is the MPC. For example, if an additional dollar of income leads to a 75-cent increase in spending, the MPC is 0.75. The statement describing the increase in consumer spending when income rises by a dollar matches this concept exactly. The other options miss the focus on spending behavior: saving is about the portion of income not spent (marginal propensity to save), government spending tied to income is a fiscal policy effect rather than a household consumption response, and a decrease in spending with higher income would imply an unusual or negative MPC, not the standard definition.

MPC describes how much of an extra dollar of income people choose to spend. It’s the change in consumption divided by the change in income, so when income rises by one dollar, the amount that consumption increases is the MPC. For example, if an additional dollar of income leads to a 75-cent increase in spending, the MPC is 0.75. The statement describing the increase in consumer spending when income rises by a dollar matches this concept exactly.

The other options miss the focus on spending behavior: saving is about the portion of income not spent (marginal propensity to save), government spending tied to income is a fiscal policy effect rather than a household consumption response, and a decrease in spending with higher income would imply an unusual or negative MPC, not the standard definition.