At an initial point on the aggregate demand curve, the price level is 100, and real gdp is $18 trillion. after the price level rises to 110, however, there is an upward movement along the aggregate demand curve, and real gdp declines to $14 trillion. if total planned spending declined by $200 billion in response to the increase in the price level, what is the marginal propensity to consume in this economy?

MPC = 0.05

Explanation:

Marginal Propensity to Consume (MPC) is defined as the proportion of an aggregate raise in pay that a consumer spends on goods and services rather than saving .

Here, since the spending is declined by $200 billion, it shows that consumption (C) is also reduced by $200 billion.

The aggregate income (Y) is declined by: ($18 - $14) trillion = $4 trillion

MPC is calculated as follows;

MPC = dC/dY

= $200 billion/$4 trillion

= 0.2/4

= 0.05

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