Define the marginal propensity to consume (MPC) and the fiscal multiplier.

Define the marginal propensity to consume (MPC) and the fiscal multiplier.

• A. MPC is the fraction of an additional dollar of income that is spent; the multiplier is 1/(1 - MPC).
• B. MPC is the fraction of income saved from an extra dollar; multiplier is 1 - MPC.
• C. MPC is the total consumption in the economy; multiplier is equal to MPC.
• D. MPC is the marginal price of consumption; multiplier is the ratio of GDP to input.

Answer: (A)

The main idea tested is how much of an extra income households spend and how that spending grows GDP through the workflow of repeated spending. MPC is the fraction of an additional dollar of income that households choose to spend rather than save; for example, if MPC = 0.8, a $100 windfall raises consumption by $80. The fiscal multiplier shows the total rise in GDP from an initial, autonomous spend, and in the simple closed-economy model with no taxes or imports the total effect is ΔY = ΔG × [1 + MPC + MPC^2 + ...] = ΔG / (1 − MPC). So the multiplier is 1/(1 − MPC). This is the best description because it directly connects how extra income translates into more spending and how that additional spending amplifies overall output. The other statements misidentify what MPC measures or misstate the multiplier: they swap saving for spending, confuse total consumption or the multiplier with MPC, or use incorrect terminology for price or inputs.

The main idea tested is how much of an extra income households spend and how that spending grows GDP through the workflow of repeated spending. MPC is the fraction of an additional dollar of income that households choose to spend rather than save; for example, if MPC = 0.8, a $100 windfall raises consumption by $80. The fiscal multiplier shows the total rise in GDP from an initial, autonomous spend, and in the simple closed-economy model with no taxes or imports the total effect is ΔY = ΔG × [1 + MPC + MPC^2 + ...] = ΔG / (1 − MPC). So the multiplier is 1/(1 − MPC). This is the best description because it directly connects how extra income translates into more spending and how that additional spending amplifies overall output. The other statements misidentify what MPC measures or misstate the multiplier: they swap saving for spending, confuse total consumption or the multiplier with MPC, or use incorrect terminology for price or inputs.