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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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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 Summary

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

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