Uploaded by Sarah Lauer


Erika Casey
EEC 2303
Week 7
24 February 2020
1. What is the Marginal Propensity to Consume (MPC)?
Marginal Propensity to Consume is when someone gets a pay raise and decides to spend that extra
money instead of saving it. An example would be someone who wants to finance a newer car when they
get that raise.
2. How do you think the value of MPC varies across households with different income levels? Who
has relatively higher or lower MPCs, people with higher incomes, or lower incomes? Why?
The value of MPC will depend on several factors; not just income levels but also how much they can
spend. The value of MPC will be different if someone has debts, compared to someone with fewer bills.
Perhaps that increase in pay happens the exact same time as an increase in rent. I do not think income
level determines whether someone has a higher or lower MPC. Someone with a higher MPC does not
necessarily have a higher income.
If John makes $30,000 a year and gets a raise, he may have a higher MPC than Mary because his monthly
expenses are low. Mary on the other hand, makes $85,000 a year and gets a raise. That doesn’t mean she
will have a higher MPC than John because Mary has a lot of monthly expenses or perhaps fines to pay,
and therefore cannot afford to spend the raise money on anything except expenses. So, in determining
who has a higher MPC, income level cannot determine that. It would be a person's monthly expenses and
upcoming debts/ how much money they receive= high or low MPC. Monthly expenses / pay increase =
3. We have discussed how the government uses fiscal policy to stimulate the economy. How might
the government increase individuals disposable income?