Question

1. Define/explain the concept of ‘Marginal Propensity to Consume’ (MPC).

2. List and briefly explain at least 3 of the primary ‘determinants’ of MPC (One of these ‘determinants’ should be the topic of ‘expectations of future economic conditions’).

3. Discuss how does ‘Fear, Uncertainty, and Doubt’ (FUD) lead to adverse ‘shocks’ to the economy.

4. And finally, discuss how adverse changes in overall ‘consumer expectations’ and ‘uncertainty’ resulting from the ‘financial crisis of 2007-2008’ affected subsequent Personal Consumption (C) and Private Investment (I)

Answer 1

1) Marginal propensity to consume (MPC) measures the change in consumption due to change in income. It measures the proportion of extra income that is spent on consumption. It is denoted as ∆C/∆Y. For example if if an individual gains an extra $100, and spends $80 on consumption, then the marginal propensity to consume will be 80/100 = 0.80.