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13 June, 23:51

Suppose that consumption is $400 and that the marginal propensity to consume is. 8. If disposable income increases by $1200, consumption spending will increase by: (Don't feel guilty if you used a calculator here, you will able to use one on the AP exam this year!)

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  1. 14 June, 02:34
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    Consumption will increase by $960

    Explanation:

    Consumption Function is a function showing consumption & income relationship, signifying how consumption is dependent on income.

    C = a + b. Y;

    where C = Consumption; a = Autonomous consumption at 0 income level; Y = Income; b = Marginal Propensity to consume, i. e Change (addition) in consumption due to change (additional) Income = ΔC / ΔY.

    MPC = ΔC / ΔY

    Given : MPC = 0.8, ΔY = 1200

    0.8 = ΔC / 1200

    ΔC = 1200 (0.8)

    ΔC [Change in Consumption] = 960
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