A:

The marginal propensity to consume can be negative, or less than zero, if the income increase leads to reduced consumption that is below the consumption level that existed before the income increase.

In Keynesian economics, the marginal propensity to consume is a ratio that compares change in consumption to change in income, usually providing a value between 0 and 1. Keynesian theory suggests that any increase in consumer spending (consumption) occurs with a corresponding increase in disposable, or extra, income. The percentage of extra income that is spent on consumption represents the marginal propensity to consume.

The marginal propensity to consume (MPC) is only one side of the coin. Subtracting one from the MPC is equal to the marginal propensity to save (MPS), which measures the rate of savings remaining after an increase in income. Both the MPC and MPS are key metrics used to determine the multiplier value, which is part of Keynesian economic theory.

In the classic Keynesian model, the MPC is lower than the average propensity to consume because in the short term, consumption does not fluctuate significantly due to income changes. However, over longer time periods, when more is earned and incomes rise, consumption also rises.

Interest rates do not typically have a significant impact on the MPC. The general theory suggests that high interest rates would prompt an increase in saving. The truth, however, is that higher interest rates often mean that individuals have less disposable income available to save.

Frequently, economists make distinctions between the MPC from permanent income and the MPC from temporary income. Consumers expecting a permanent change in income have greater motivation to increase the amount they consume.

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