If there is an increase in consumption‚ there will be a fall in savings If increase in savings‚ fall in consumption The proportion of any extra income that is earned by a person that is spent by them on consumption is called the marginal propensity to consume (MPC). So MPC = change in consumption Change in income Y=C+S APC+APS= 1 MPC+MPS = 1 Y C S APC APS MPC MPS 100 80 20 0.8 0.20 - -
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THE MULTIPLIER EFFECT When the government buys $20 billion of goods from Boeing‚ that purchase has repercussions. The immediate impact of the higher demand from the government is to raise employment and profits at Boeing. Then‚ as the workers see higher earnings and the firm owners see higher profits‚ they respond to this increase in income by rising their own spending on consumer goods. As a result‚ the government purchase from Boeing raises the demand for the products of many other firms in
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[5] a. If disposable income were $7400‚ how much would be saved? b. What is the "break-even" level of disposable income? c. What is this economy’s marginal propensity to consume? d. What is the average propensity to consume when disposable income is $7000? When disposable income is $8000? Qs.4 a. Suppose a $100 increase in desired investment spending ultimately results in a $300 increase in real GDP. What is
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the marginal propensity to save and the capital-output ratio. This is a very significant result. It tells us how the economy can grow such that the growth in the capacity of the economy to produce is matched by the demand for the economy’s output. Consider this numerical illustration. Suppose the economy is currently operating at a capacity production level of 1000 per year and has a capital-output ratio of 3. This means the capital stock is 3000. Assume the marginal propensity to consume out
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consumption on what they consider their “normal income”. In doing this‚ they attempts to maintain a fairly constants standard of living even thought their incomes may vary considerably from month to month or from year to year. As a result‚ increase and decrease in income that people see as temporary have little effect on their consumption spending. Friedman asserts that consumption is determined by long term expected income rather than current level of income. It is this long-term expected income which
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is the income multiplier. (If c1 is the marginal propensity to consume‚ and $1 is spent in the economy‚ the person who gets that dollar will spend c1 of it‚ the person who receives that c1 will spend c1(c1) or c12‚ and so forth. Without deriving it‚ it turns out that 1 + c1 + c12 + c13 + …….. + c1n converges to 1/{1 – c1}‚ or the multiplier.) Let’s say we estimate a consumption function from the available data‚ and the marginal propensity to consume is estimated to be c1 = .80 (meaning that
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the interest rate changes. You are given the following information concerning autonomous consumption‚ the magical propensity to consume‚ planned investment‚ government purchases and goods and services‚ and net exports. Ca =1500-10r c=0.6 T=1800 Ip=2400-50r G=2000 NX=-200 a. Compute the value of the marginal propensity to save. 1-c = s 1 - 0.6= .04 Marginal propensity to save is .04 b. Compute the amount of autonomous planned spending Ap‚ given that the interest rate equals 3. Ca
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CHAPTER 16 Government Debt Questions for Review 1. What is unusual about U.S. fiscal policy since 1980 is that government debt increased sharply during a period of peace and prosperity. Over the course of U.S. history‚ the indebtedness of the federal government relative to GDP has varied substantially. Historically‚ the debt–GDP ratio generally increases sharply during major wars and falls slowly during peacetime. The 1980s and 1990s are the only instance in U.S. history of a large increase in
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example‚ if you get promoted and you get a salary increase‚ this change will be probably permanent and so your consumption over time will probably rise. If instead you win the lottery‚ this represents a transitory income and you will probably not consume all of this transitory income. The key point is that the consumption plan does not depend on the transitory components. To provide empirical content to this hypothesis‚ Friedman added the assumptions that the transitory components are uncorrelated
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down‚ CS increase due to 2 reasons. Existing buyers pay less. More buyers are able to enter market. Producer surplus Markets select low cost suppliers. Only those whose costs of production are below the market price enter. When price goes down‚ ‘marginal seller’ drops out. When
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