At an initial point on the aggregate demand curve, the price level is 100, and real to GDP is $15trillion. After the price level rises to 110, however, there is an upward movement along the aggregate demand curve, and real GDP declines to $14 trillion. If total autonomous spending declined by $200 billions in sponse to the price level, what is the marginal propensity to consume in this economy?

Question

At an initial point on the aggregate demand curve, the price level is 100, and real to GDP is $15trillion. After the price level rises to 110, however, there is an upward movement along the aggregate demand curve, and real GDP declines to $14 trillion. If total autonomous spending declined by $200 billions in sponse to the price level, what is the marginal propensity to consume in this economy?

Answer 1

To determine the marginal propensity to consume (MPC) in this economy, we first need to calculate the change in total spending resulting from the change in the price level.

1. Calculate the initial level of aggregate demand (AD) using the given price level and real GDP:
AD1 = Price Level x Real GDP
AD1 = 100 x $15 trillion
AD1 = $1,500 trillion

2. Calculate the new level of aggregate demand after the price level rises to 110 and real GDP declines to $14 trillion:
AD2 = Price Level x Real GDP
AD2 = 110 x $14 trillion
AD2 = $1,540 trillion

3. Calculate the change in total spending (ΔAD) by subtracting the initial aggregate demand from the new aggregate demand:
ΔAD = AD2 - AD1
ΔAD = $1,540 trillion - $1,500 trillion
ΔAD = $40 trillion

4. Given that the change in total autonomous spending (ΔAutonomous Spending) is $200 billion, we can now determine the MPC:
MPC = ΔAutonomous Spending / ΔAD
MPC = $200 billion / $40 trillion

Converting the figures to the same units (trillions):
MPC = $0.2 trillion / $40 trillion
MPC = 0.005

Therefore, the marginal propensity to consume (MPC) in this economy is 0.005, or 0.5%.

Answer 2

To find the marginal propensity to consume (MPC), we need to use the information given in the question.

The MPC is the change in consumption divided by the change in income. In this case, we can consider the change in real GDP as a measure of income.

From the information given, we know that when the price level rises to 110, there is an upward movement along the aggregate demand curve and real GDP declines to $14 trillion. This means there is a change in real GDP of $1 trillion ($15 trillion - $14 trillion).

Now, we also know that total autonomous spending declined by $200 billion in response to the price level. Autonomous spending refers to the portion of spending that does not depend on income or price levels. In this case, we can assume that the decline in autonomous spending is equal to the decline in consumption.

So, the change in consumption is $200 billion.

Therefore, the MPC can be calculated as follows:

MPC = Change in consumption / Change in income
MPC = $200 billion / $1 trillion
MPC = 0.2

Therefore, the marginal propensity to consume in this economy is 0.2, or 20%.