Events & Promotions
|
|
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
Track
Your Progress
Practice
Pays
Not interested in getting valuable practice questions and articles delivered to your email? No problem, unsubscribe here.
Nov 1912:30 PM EST
-01:30 PM EST
Learn how Keshav, a Chartered Accountant, scored an impressive 705 on GMAT in just 30 days with GMATWhiz's expert guidance. In this video, he shares preparation tips and strategies that worked for him, including the mock, time management, and more
Nov 1811:00 AM PST
-12:00 PM PST
Join us in a live GMAT practice session and solve 30 challenging GMAT questions with other test takers in timed conditions, covering GMAT Quant, Data Sufficiency, Data Insights, Reading Comprehension, and Critical Reasoning questions.
Nov 2001:30 PM EST
-02:30 PM IST
Learn how Kamakshi achieved a GMAT 675 with an impressive 96th %ile in Data Insights. Discover the unique methods and exam strategies that helped her excel in DI along with other sections for a balanced and high score.
Nov 2211:00 AM IST
-01:00 PM IST
Do RC/MSR passages scare you? e-GMAT is conducting a masterclass to help you learn – Learn effective reading strategies Tackle difficult RC & MSR with confidence Excel in timed test environment- Nov 23
11:00 AM IST
-01:00 PM IST
Attend this free GMAT Algebra Webinar and learn how to master the most challenging Inequalities and Absolute Value problems with ease. 
Nov 2407:00 PM PST
-08:00 PM PST
Full-length FE mock with insightful analytics, weakness diagnosis, and video explanations!
Nov 2510:00 AM EST
-11:00 AM EST
Prefer video-based learning? The Target Test Prep OnDemand course is a one-of-a-kind video masterclass featuring 400 hours of lecture-style teaching by Scott Woodbury-Stewart, founder of Target Test Prep and one of the most accomplished GMAT instructors.
BillyZ
Current Student
Joined: 14 Nov 2016
Last visit: 03 May 2025
Posts: 1,143
Given Kudos: 926
Location: Malaysia
Concentration: General Management, Strategy
Schools: Sloan '23 (D) Tuck '23 (D) Darden '23 (D) Ross '23 (D) Kellogg '23 (D) Wharton '23 (D) Booth '23 (D) Fuqua '24 (A) Harvard '24 (D) Stanford '24 (D)
GMAT 1: 750 Q51 V40 (Online)
GPA: 3.53
Products:
Schools: Sloan '23 (D) Tuck '23 (D) Darden '23 (D) Ross '23 (D) Kellogg '23 (D) Wharton '23 (D) Booth '23 (D) Fuqua '24 (A) Harvard '24 (D) Stanford '24 (D)
GMAT 1: 750 Q51 V40 (Online)
Posts: 1,143
Updated on: 05 Jan 2021, 03:19
Originally posted by BillyZ on 10 Oct 2017, 05:51.
Last edited by Sajjad1994 on 05 Jan 2021, 03:19, edited 2 times in total.
Last edited by Sajjad1994 on 05 Jan 2021, 03:19, edited 2 times in total.
Updated - Complete topic (675).
Kudos
Bookmarks
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.
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.
Show SpoilerOA&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.
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.
(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.
Archived Topic
Hi there,
This topic has been closed and archived due to inactivity or violation of community quality standards. No more replies are possible here.
Where to now? Join ongoing discussions on thousands of quality questions in our Reading Comprehension (RC) Forum
Still interested in this question? Check out the "Best Topics" block below for a better discussion on this exact question, as well as several more related questions.
Thank you for understanding, and happy exploring!
25 Oct 2017, 11:30
Kudos
Bookmarks
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.
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.
25 Oct 2017, 11:46
Kudos
Bookmarks
nairaneesh
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!
