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Marginal Propensity Unit 3

This document provides examples and explanations of key macroeconomic concepts: 1. It calculates the marginal propensity to consume (MPC) given a change in consumption and income. 2. It defines personal savings as disposable income minus consumption, and explains that a negative savings value means spending exceeds income. 3. It defines the multiplier as the change in GDP divided by the change in autonomous expenditures, and calculates it given values for each. 4. It shows that a marginal propensity to save (MPS) of 1/3 corresponds to a multiplier of 3. 5. It explains that a tax cut causing the multiplier to increase to 5 would mean the MPS changed to 1/

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Richy Joshua
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68 views2 pages

Marginal Propensity Unit 3

This document provides examples and explanations of key macroeconomic concepts: 1. It calculates the marginal propensity to consume (MPC) given a change in consumption and income. 2. It defines personal savings as disposable income minus consumption, and explains that a negative savings value means spending exceeds income. 3. It defines the multiplier as the change in GDP divided by the change in autonomous expenditures, and calculates it given values for each. 4. It shows that a marginal propensity to save (MPS) of 1/3 corresponds to a multiplier of 3. 5. It explains that a tax cut causing the multiplier to increase to 5 would mean the MPS changed to 1/

Uploaded by

Richy Joshua
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Uopeople

Macroeconomics

Week 3

1. What is the marginal propensity to consume when consumption changes from 7


to 6 and disposable income changes from 5 to 3?

Marginal propensity is equal to the change in consumption divided by the change in income
or marginal propensity to consume (MPC) is the ratio of the change in consumption ∆ C to the
change in disposable income ∆ Cd .

Therefore, the marginal propensity to consume is:

MPC = ∆ consumption / ∆ income

Change in consumption is 7 - 6 = 1

Change in income is 5 - 3 =2

Therefore, MPC =1/2 or 0.5

2. If disposable personal income is 10 and consumption is 12, what is personal


savings? What does it mean?

Personal savings is calculated by subtracting consumption from disposable personal income.

Personal Savings = ∆ Y minus ∆ C

Therefore, 10 - 12 = -2 0r negative two.

What does this mean?

This means that spending or consumption is done more than there is income, hence, the
negative result indicate that there is no income (money) to spend or to save.

3. What is the multiplier when the change in equilibrium level of real GDP in the
aggregate expenditures model is 9, and change in autonomous aggregate expenditures is
3?

Multiplier is the Change in Equilibrium level of real GDP/Autonomous Aggregate


Expenditures.

Multiplier
∆ Equilibrium level of GDP = 9

Autonomous Aggregate Expenditures = 3

Therefore, multiplier is 9/3 = 3

4. What is the multiplier when the marginal propensity to save is 1/3?

When the marginal prosperity to save is 1/3. Our multiplier is equal to 3.

Spending multiplier = 1 divided by 1/3 = 3

1
Thus, 0.333 = 3
❑

5. What would happen to the marginal propensity to save when a tax cut was
enacted causing the multiplier to change to 5?

The marginal prosperity would equal to MPS = 1/5

1
Spending multiplier = MPS ×Change
❑
1
5 = MPS
❑
MPS = 1/5 or 0.5

This means, the real GDP will include the change in aggregate expenditure caused by the
marginal propensity to consumption. So the slope of the aggregate expenditure curve is thus
related to the size of the multiplier which is only the size our multiplier will change the
overall slope of our aggregate expenditure curve.

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