Why is the MPC between 0 and 1?

Why is the MPC between 0 and 1?

• A. Because all extra income is saved.
• B. Because households spend only part, not all, of any additional income.
• C. Because the government taxes all additional income.
• D. Because prices adjust instantly.

Answer: (B)

The main idea is that the marginal propensity to consume measures how much of an extra unit of income you actually spend. When income rises a little, people typically use only a part of that rise for consumption and save the rest (or set it aside for taxes). That means the change in consumption is some fraction of the change in income, not the whole amount, so the MPC can range from zero up to one. For example, if extra income goes up by $100 and you spend $60, your MPC is 0.6. If you spent all of it, MPC would be 1; if you saved all of it, MPC would be 0. The other ideas imply all extra income is saved, taxed, or tied to price changes, which isn’t how MPC is defined in this context.

The main idea is that the marginal propensity to consume measures how much of an extra unit of income you actually spend. When income rises a little, people typically use only a part of that rise for consumption and save the rest (or set it aside for taxes). That means the change in consumption is some fraction of the change in income, not the whole amount, so the MPC can range from zero up to one. For example, if extra income goes up by $100 and you spend $60, your MPC is 0.6. If you spent all of it, MPC would be 1; if you saved all of it, MPC would be 0. The other ideas imply all extra income is saved, taxed, or tied to price changes, which isn’t how MPC is defined in this context.