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Analyzing the effect of change in MPC on aggregate expenditure

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Suppose MPC is 0.8 initially. Households then change their behavior so that the MPC falls to 0.75. What happens to aggregate expenditures? Why?

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Solution Summary

Solution discusses the impact of changes in MPC on aggregate expenditure.

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MPC represents the fraction of additional income that is used for consumption expenditures. Higher value of MPC means that people will spend more of every additional dollar they earn. Lower value of MPC indicates that the ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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