The fraction of an additional unit of income that a household spends on consumption rather than saving, that is, the change in consumption divided by the change in income.
- It is written MPC and lies between 0 and 1; the rest of the extra income is saved, measured by the marginal propensity to save (MPS), so MPC plus MPS equals 1.
- It is central to the Keynesian multiplier: the spending multiplier equals 1 divided by (1 minus MPC), so a higher MPC produces a larger boost to income from any extra spending.
- Poorer households tend to have a higher MPC (they spend most of any extra income), so transfers to them give a bigger demand boost.
- It underpins the case for fiscal stimulus in a slump: government spending raises income, part of which is re-spent, multiplying the effect.
- It links to the money-supply multiplier as a separate "multiplier" idea; see concept money multiplier and the concept fiscal vs monetary policy choice.
The definition (share of extra income spent), the MPC plus MPS equals 1 identity, and the multiplier formula are testable macro-theory facts.
The marginal propensity to consume (share of extra income spent) is the income multiplier's basis; it is different from the money multiplier, which concerns base money and bank lending.
Share of extra income that is spent; with MPS it sums to 1; drives the Keynesian spending multiplier, 1 divided by (1 minus MPC).