Answer to Question #251379 in Macroeconomics for Nickname

Question

If income increases from R1500 to R2000 and the marginal propensity to consume is 0.8, the new level of consumption will be?

(a) R3500.

(b) R400.

(c) R1400.

(d) R500.

(e) Not enough information has been provided. 

Answer 1

Change in Consumption = change in income $\times$ marginal propensity to consume.

$=(2000-1500)\times0.8$

$=R 400$ .

$\therefore$ consumption increases by R400.

Since we haven't been given the initial level of consumption, we cannot find the new level of consumption. We only get to know the change in level of consumption which is R 400.