It is currently 23 Nov 2017, 04:48

Close

GMAT Club Daily Prep

Thank you for using the timer - this advanced tool can estimate your performance and suggest more practice questions. We have subscribed you to Daily Prep Questions via email.

Customized
for You

we will pick new questions that match your level based on your Timer History

Track
Your Progress

every week, we’ll send you an estimated GMAT score based on your performance

Practice
Pays

we will pick new questions that match your level based on your Timer History

Not interested in getting valuable practice questions and articles delivered to your email? No problem, unsubscribe here.

Close

Request Expert Reply

Confirm Cancel

Events & Promotions

Events & Promotions in June
Open Detailed Calendar

In economics, the concept of “propensity to consume” refers to the pro

  new topic post reply Question banks Downloads My Bookmarks Reviews Important topics  
Author Message
TAGS:

Hide Tags

Senior SC Moderator
User avatar
D
Joined: 14 Nov 2016
Posts: 1242

Kudos [?]: 1301 [0], given: 434

Location: Malaysia
GMAT ToolKit User Premium Member CAT Tests
In economics, the concept of “propensity to consume” refers to the pro [#permalink]

Show Tags

New post 10 Oct 2017, 05:51
1
This post was
BOOKMARKED
Question 1
00:00
A
B
C
D
E

Question Stats:

19% (02:58) correct 81% (02:46) wrong based on 108

HideShow timer Statistics

In economics, the concept of “propensity to consume” refers to the proportion of disposable income – income after taxes and transfers – that individuals spend on consumption. Marginal propensity to consume (MPC) is a related metric that quantifies induced consumption, the idea that as income increases a consumer’s consumption will also increase. MPC is the proportion of that additional income that an individual consumes; for example, if a household earns one extra dollar of disposable income, and the marginal propensity to consume is 0.65, then of that dollar, the household will spend 65 cents and save 35 cents.

In a standard Keynesian model, the MPC will be less than the average propensity to consume (APC) because in the short-run some (autonomous) consumption does not change with income. Short-term decreases in income do not lead to reductions in consumption, because people reduce savings to stabilize consumption. Over the long-run, as wealth and income rise, consumption also rises; the marginal propensity to consume out of long-run income is closer to the average propensity to consume.

Economists often distinguish between the marginal propensity to consume out of permanent income and the marginal propensity to consume out of temporary income, because if consumers expect a change in income to be permanent, then they have a greater incentive to increase their consumption. This implies that the Keynesian multiplier – the measure of that consumption’s impact on additional consumption in the marketplace – should be larger in response to permanent changes in income than it is in response to temporary changes in income (though the earliest Keynesian analyses ignored these subtleties). However, the distinction between permanent and temporary changes in income is often subtle in practice, and it is often quite difficult to designate a particular change in income as being permanent or temporary. What is more, the marginal propensity to consume should also be affected by factors such as the prevailing interest rate and the general level of consumer surplus that can be derived from purchasing.

[Reveal] Spoiler: OA&OE
C. In this Inference question, it can be inferred from the passage (in paragraph 2) that short-term decreases in income force people to increase their consumption relative to earnings, as you’re told that consumption does not decrease in the short-run. This, then would mean that the ratio of consumption to earnings goes up, therefore increasing MPC.

Question ID: 09960
1. According to the passage, it can be inferred that:

(A) When a household’s income increases, its marginal propensity to consume decreases.
(B) Most households cannot accurately delineate between permanent and temporary changes in income.
(C) Decreases in income generally lead to short-run increases in marginal propensity to consume.
(D) Early Keynesian analyses did not allow for a Keynesian multiplier for income changes with regard to marginal propensity to consume.
(E) In the short run, it is impossible for a household to have a negative marginal propensity to consume.

[Reveal] Spoiler: Question #1 OA

_________________

"Be challenged at EVERY MOMENT."

“Strength doesn’t come from what you can do. It comes from overcoming the things you once thought you couldn’t.”

"Each stage of the journey is crucial to attaining new heights of knowledge."

Rules for posting in verbal forum | Please DO NOT post short answer in your post!

Kudos [?]: 1301 [0], given: 434

Economist GMAT Tutor Discount CodesMath Revolution Discount CodesKaplan GMAT Prep Discount Codes
Senior Manager
Senior Manager
User avatar
S
Joined: 03 Apr 2013
Posts: 277

Kudos [?]: 44 [0], given: 856

GMAT ToolKit User
Re: In economics, the concept of “propensity to consume” refers to the pro [#permalink]

Show Tags

New post 25 Oct 2017, 04:54
Confused between B and C. I chose B, and I don't understand why B is wrong. I don't disagree with C though, but I don't know why B is wrong.
_________________

Spread some love..Like = +1 Kudos :)

Kudos [?]: 44 [0], given: 856

Intern
Intern
avatar
Joined: 23 Sep 2017
Posts: 5

Kudos [?]: 0 [0], given: 4

Re: In economics, the concept of “propensity to consume” refers to the pro [#permalink]

Show Tags

New post 25 Oct 2017, 06:21
Please explain how C is a valid answer.
I am confused because MPC is applicable only when additional income comes in to play.

Kudos [?]: 0 [0], given: 4

1 KUDOS received
Intern
Intern
avatar
B
Joined: 28 Apr 2017
Posts: 40

Kudos [?]: 3 [1], given: 51

Re: In economics, the concept of “propensity to consume” refers to the pro [#permalink]

Show Tags

New post 25 Oct 2017, 11:30
1
This post received
KUDOS
The passage talks about MPC, APC and consumption and how they are related.
In between B and C. I kept B as an option as I read through it. Passage says it is difficult to differentiate but it doesn't mention that it is for household...so kept on hold
Option C.. It says when income reduces in short run consumption remains same..that means savings are reduced and a greater proportion of income is dedicated to consumption. Hence option C.

Kudos if you like the explanation.

Kudos [?]: 3 [1], given: 51

4 KUDOS received
Intern
Intern
avatar
B
Joined: 04 Sep 2017
Posts: 8

Kudos [?]: 5 [4], given: 61

Re: In economics, the concept of “propensity to consume” refers to the pro [#permalink]

Show Tags

New post 25 Oct 2017, 11:46
4
This post received
KUDOS
nairaneesh wrote:
Please explain how C is a valid answer.
I am confused because MPC is applicable only when additional income comes in to play.

Read this line in the second paragraph - "Short-term decreases in income do not lead to reductions in consumption, because people reduce savings to stabilize consumption."
Earlier, if Income was $1000 and MPC was 0.72 (consumption 1000* 0.72 = $720), and now if the income falls to $800, the consumption remains same, then the MPC increases to 0.9 (720/800).

Hope this helps!

Kudos [?]: 5 [4], given: 61

Senior Manager
Senior Manager
avatar
G
Joined: 09 Feb 2015
Posts: 372

Kudos [?]: 4 [0], given: 197

Location: India
Concentration: Social Entrepreneurship, General Management
GMAT 1: 690 Q49 V34
GMAT 2: 720 Q49 V39
GPA: 2.8
Premium Member Reviews Badge CAT Tests
Re: In economics, the concept of “propensity to consume” refers to the pro [#permalink]

Show Tags

New post 03 Nov 2017, 23:53
Sprincejindal wrote:
nairaneesh wrote:
Please explain how C is a valid answer.
I am confused because MPC is applicable only when additional income comes in to play.

Read this line in the second paragraph - "Short-term decreases in income do not lead to reductions in consumption, because people reduce savings to stabilize consumption."
Earlier, if Income was $1000 and MPC was 0.72 (consumption 1000* 0.72 = $720), and now if the income falls to $800, the consumption remains same, then the MPC increases to 0.9 (720/800).

Hope this helps!


I agree with what you say but the very definition of MPC is that additional income that the family consumes. So if there is a decrease in income ,the MPC will be negative no ?

I think if the answer choice were to be rephrased, Decreases in income generally lead to short-run increases in propensity to consume. Choice c would be right.
:?

Kudos [?]: 4 [0], given: 197

Intern
Intern
avatar
B
Joined: 04 Sep 2017
Posts: 8

Kudos [?]: 5 [0], given: 61

Re: In economics, the concept of “propensity to consume” refers to the pro [#permalink]

Show Tags

New post 04 Nov 2017, 04:20
goforgmat wrote:
Sprincejindal wrote:
nairaneesh wrote:
Please explain how C is a valid answer.
I am confused because MPC is applicable only when additional income comes in to play.

Read this line in the second paragraph - "Short-term decreases in income do not lead to reductions in consumption, because people reduce savings to stabilize consumption."
Earlier, if Income was $1000 and MPC was 0.72 (consumption 1000* 0.72 = $720), and now if the income falls to $800, the consumption remains same, then the MPC increases to 0.9 (720/800).

Hope this helps!


I agree with what you say but the very definition of MPC is that additional income that the family consumes. So if there is a decrease in income ,the MPC will be negative no ?

I think if the answer choice were to be rephrased, Decreases in income generally lead to short-run increases in propensity to consume. Choice c would be right.
:?


MPC is not the additional income that a family consumes, but it is the proportion of that additional income that a family consumes. It is the ratio of changes in consumtion to changes in income. So when the income (Denominator) reduces, but the consumption (Numerator) remains the same, then the MPC (Ratio) increases.

Kudos [?]: 5 [0], given: 61

Re: In economics, the concept of “propensity to consume” refers to the pro   [#permalink] 04 Nov 2017, 04:20
Display posts from previous: Sort by

In economics, the concept of “propensity to consume” refers to the pro

  new topic post reply Question banks Downloads My Bookmarks Reviews Important topics  


GMAT Club MBA Forum Home| About| Terms and Conditions| GMAT Club Rules| Contact| Sitemap

Powered by phpBB © phpBB Group | Emoji artwork provided by EmojiOne

Kindly note that the GMAT® test is a registered trademark of the Graduate Management Admission Council®, and this site has neither been reviewed nor endorsed by GMAC®.