In Economics, the MPC full form is Marginal Propensity to Consume (MPC). It is defined as the proportion of an aggregate increase in pay that a consumer would spend on the consumption of goods and services contrary to saving it. Marginal Propensity to Consume is an important component of Keynesian macroeconomic theory and can be simply calculated by dividing consumption by the change in income.
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How to Calculate MPC?
In order to calculate the Marginal Propensity to Consume (MPC), we divide the change in consumption by the change in income. For example, if the spending of a person is increased 90% more for a new dollar of earnings then, we would express the change as 0.9/1 = 0.9. However, on the other hand, consider that a person receives a bonus of let’s say USD 1000 and spends USD 100 from this, saving the rest of USD 900, the Marginal Propensity to Consume would be equal to 100/1000 = 0.1.
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What is the Role of MPC in Economics?
As per the Keynesian macroeconomic theory, the Marginal Propensity to Consume is a key variable to show the multiplier effect of economic stimulus spending. To be more specific, it suggests that a boost in government spending will increase consumer income and as a result, consumer spending will rise. On a macroeconomic level, this increase in investment will eventually result in a higher aggregate level of demand.
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