Assume that daniel makes $40,000 a year. his employer gave him a $10,000 a year raise. daniel’s spending increased from $35,000 to $42,500. what is daniel’s mpc? explain. (in other words, show the math) based on your answer in part a, if congress increased spending by $5 billion, how is gdp impacted? (hint: recall that “how” means “how and why”)

In economics, when finance people talk about MPC, they refer to the Marginal Propensity to Consume. This is simply the ratio of the change in consumption to the change in income. Qualitatively, this measures the ability of a person to save his earnings by minimizing his expenditures.

The equation for MPC is ΔConsumption/ΔIncome. Therefore, MPC is the slope of a graph whose x-axis is income and consumption as its y-axis. 

MPC = ($42,500 - $35,000)/($50,000-$40,000)
MPC = 3/4 or 0.75

On the next section, there is no clear answer how an increased spending affects the GDP. Technically, it is the budget deficit that could tell the effect. But still, it would depend on the type of spending and its effect on the long run. Generally, when the government has great spending on projects that would create opportunities for job openings and investments, then the GDP would increase. But if it not, then it would create a large budget deficit. It will be experienced long term through high inflation rates to catch up with the debt.

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