Question

At an initial point on the aggregate demand curve, the price level is 100, and real GDP is $\mathrm{S}18$trillion. After the price level rises to 110 , however, there is an upward movement along the aggregate demand curve, and real GDP declines to $\mathrm{S}14$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?

Short answer

Aggregate demand refers to the entire demand for all services and goods in the economy. The closed economy is made up of consumer spending (C), investment spending (I), and government spending (G) (G). In a free economy, however, it includes not only these but also exports (E) and imports (I) (M).

It can be expressed numerically as follows:

$Y=C+I+G+X-M$

Step-by-step solution

Real GDP and price level are:

Introduction

The initial price level is 100, and real GDP is 100.$18$When the price level goes to 110, however, the actual GDP drops to$14$trillion. The demand curve, which displays the inverse relationship between price level and real GDP, will trend upward.

Step 2:Explation

The amount of change in consumption owing to a change in income level is known as marginal propensity to consume. MPC is another way to write it.

The budgeted amount has been lowered.$200$As a result, the change in consumption will be billion. $200$billion (or $0.20$trilion) and the change in real GDP/Income $4$trillion.

As a result, MPC can be calculated as follows:

$MPC=$$\frac{\partial C}{\partial Y}$

$=\frac{0.20}{4}$

$=0.05$

As a result, MPC has a high value. $\mathbf{0}\mathbf{.}\mathbf{05}$