The fraction of an additional dollar of income a household spends rather than saves. Formally the derivative of consumption with respect to income, ranging from 0 to 1, MPCs vary sharply across households by liquidity, wealth, and the persistence of the income shock.
How it works
MPC = ΔC / ΔY: the change in consumption divided by the change in disposable income. In incomplete-markets models, hand-to-mouth and liquidity-constrained households exhibit MPCs near 1, while wealthy unconstrained households smooth consumption and show MPCs near 0. The aggregate MPC therefore depends on the distribution of income shocks across the wealth ladder, not just the average.
Why it matters now
MPC heterogeneity governs how fiscal transfers, tariff-driven price shocks, and rising macro uncertainty transmit to demand in 2025-26; recent work finds MPCs rise then flatten (concave) in uncertainty, shaping the consumption response to a noisy policy environment.
Example
In US studies of the 2008 stimulus rebates and 2020 pandemic checks, estimated MPCs clustered around 0.25-0.40 in the first quarter for the median household but exceeded 0.6-0.7 for low-liquidity recipients, meaning a $1,000 transfer to constrained households generated far more near-term spending than the same dollar to high-wealth households.
Frequently asked
- What is the marginal propensity to consume (MPC)?
- The marginal propensity to consume is the fraction of an extra dollar of income a household spends rather than saves, formally ΔC/ΔY and bounded between 0 and 1. It varies sharply across households: liquidity-constrained, hand-to-mouth families show MPCs near 1, while wealthy unconstrained households smooth consumption and show MPCs near 0.
- Why does MPC heterogeneity matter for fiscal policy?
- MPC heterogeneity determines how much of a fiscal transfer actually becomes near-term demand. A dollar sent to high-MPC, liquidity-constrained households generates far more spending than the same dollar to high-wealth savers. US studies of the 2008 rebates and 2020 pandemic checks found median MPCs of 0.25–0.40 but 0.6–0.7 for low-liquidity recipients, so targeting drives the multiplier.
- How does MPC differ from the average propensity to consume?
- MPC is the consumption response to an additional dollar of income (ΔC/ΔY), while average propensity to consume is total consumption divided by total income (C/Y). MPC governs the marginal demand effect of transfers and shocks; APC describes the level. A household can have a high APC but a low MPC if extra income is largely saved.
- Why is the MPC higher for low-income households?
- Low-income households typically have less liquid wealth and face binding borrowing constraints, so additional income is spent immediately rather than smoothed over time. In incomplete-markets models these hand-to-mouth households exhibit MPCs near 1, while unconstrained wealthy households use saving and credit to smooth, pushing their MPCs toward 0.
- How does the persistence of an income shock affect the MPC?
- Temporary income shocks generate lower MPCs than permanent ones for unconstrained households, who save windfalls and smooth consumption per the permanent-income hypothesis. Constrained households spend regardless of persistence. Recent work also finds MPCs rise then flatten (concave) under rising macro uncertainty, shaping demand in noisy 2025–26 policy environments.