The 0.95 MPC in Terms of Consumption
The marginal propensity to consume (MPC) measures the proportional increase in discretionary expenditure caused by a change in consumer income. The formula is as follows: change in income is divided by the change in consumption. With an MPC of 0.95, 95 cents of every additional dollar made will go toward spending, while the remaining 5 cents will be saved (Song, 2019).
MPC is crucial in establishing the magnitude of the multiplier effect. Because of this multiplier effect, a little shift in expenditure has an enormous impact on GDP. A higher MPC indicates that consumers are more inclined to spend than save. Factors contributing to this tendency include the presence of credit facilities, consumer optimism, and the availability of goods and services that are accessible in the market (Song, 2019). Moreover, a higher MPC implies that a more significant proportion of any increase in income during a given period is spent on consumption, resulting in higher consumption levels.
The 0.95 MPC in Terms of Multiplier
The multiplier effect is closely bound up in the MPC as it is calculated by dividing one by one minus the MPC. It is a product of the MPC and the initial expenditure. Suppose the MPC is 0.95. In that case, the multiplier effect is computed as 1/ (1 – 0.95) = 20. This means that every $1 spent initially will yield a $20 increase in the economy’s output (Song, 2019).
A lower MPC points to a smaller proportion of any increase in income being spent on consumption, leading to lower consumption levels. A high MPC of 0.95 evinces a solid consumption propensity, which could trigger increased aggregate demand and economic growth; therefore, the higher the MPC, the more significant the multiplier effect. Moreover, the high MPC leads to a high multiplier effect, amplifying the impact of any initial change in spending. Therefore, understanding the concept of MPC and its role in macroeconomics is crucial because of its far-reaching impact on the economy as a whole.
Reference
Song, S. (2019). Leverage, hand-to-Mouth households, and heterogeneity of the marginal propensity to consume: Evidence from South Korea. Review of Economics of the Household, 18(4), 1213-1244. Web.