Answer to Question #251388 in Macroeconomics for renlove

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 income$=2000-1500=500$

Marginal propensity to consume =0.8

Change in consumption$=$ Marginal propensity to consume multiplied by the change in income.

$= 0.8\times500$

$=400$ .

$=R 400$

The level of consumption will change by R 400.

Since we have not been given the initial level of consumption, we can only know the change in consumption but we cannot find the new level of consumption.