MPC

Question 1

MPC

Answer 1

The marginal propensity to consume measures how much of any additional income people are likely to spend rather than save. A fraction that shows the proportion of extra income that goes towards consumption.

Question 2

MPC formula

Answer 2

Change in consumption/Change in income. E.g. £80 spent/£100 extra income= 0.8 MPC

Question 3

Higher MPC

Answer 3

Means people spend a larger portion of their extra income. This leads to a bigger impact on the economy as more spending stimulates demand

Question 4

Lower MPC

Answer 4

Means people save more of their extra income. This creates a smaller impact on the economy as less money circulate.

Question 5

High income individuals

Answer 5

We assume that they have a low MPC as people with higher incomes are more likely to save a larger proportion of any additional income because they already have enough for their needs and wants.

Question 6

Low income individuals

Answer 6

We assume they have a higher MPC as those with lower income tend to spend a larger proportion of any additional income because they have more unmet wants and needs or necessities to purchase.

Question 7

MPC and income

Answer 7

MPC is inversely related to income levels. This matters as government policies targeting low income groups may generate a big multiplier effect because more of the additional income gets spent stimulating demand and vice versa.