Multiple Choice
An increase in the marginal propensity to consume will:
15. Income and Consumption
The Consumption Function
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If the Keynesian consumption function is C = 10 + 0.8 Yd then, when disposable income is $1000, what is the marginal propensity to consume?
A
0.8
B
800
C
810
D
0.81
E
Cannot be determined
Verified step by step guidance1
Understand the Keynesian consumption function: C = a + bYd, where C is consumption, a is autonomous consumption, b is the marginal propensity to consume (MPC), and Yd is disposable income.
Identify the given consumption function: C = 10 + 0.8Yd. Here, 10 is the autonomous consumption, and 0.8 is the marginal propensity to consume (MPC).
Recognize that the marginal propensity to consume (MPC) is the coefficient of Yd in the consumption function, which represents the change in consumption resulting from a change in disposable income.
Note that the problem asks for the marginal propensity to consume, which is directly given as 0.8 in the function C = 10 + 0.8Yd.
Conclude that the marginal propensity to consume (MPC) is 0.8, which is the correct answer to the question.
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