ECN 204 Chapter Notes - Chapter 10: Fiscal Multiplier, Real Interest Rate, Technological Change

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3 May 2017

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Relationship: consumption and saving, primarily determined by disposable income (di) (di = labor income - taxes, direct relationship, consumption schedule (c , planned household spending (in our model) Saving schedule (s: di - c, dissaving can occur - borrow or use existing wealth. Table 10. 1 consumption and saving schedules and propensities to consume and save. Fig 10. 2 key graph - consumption and saving schedule. Fig 10. 3 the marginal propensity to consume and the marginal propensity to save. Investment is a very volatile spending category: govt. spending, consumption spending, trade spending: variability of expectations, durability - capital goods. Fig 10. 6 shifts in the investment demand (id) curve. 10. 5 the multiplier effect: a change in spending changes real gdp more than the initial change in spending. Multiplier = change in real gdp / initial change in spending. Change in gdp = multiplier x initial change in spending. Fig 10. 8 the multiplier process (mpc = 0. 75)

Related Questions

(Answer the following questions based on the given data.)

**Please show work/formulas**

Consumption and Savings Schedule

Complete the following schedule (savings, APC, APS, MPC, & MPS):

DI	C	S	APC	APS	MPC	MPS
240	244
260	260
280	276
300	292
320	308
340	324

Key: DI = Disposable Income, C=Consumption, S=Saving, APC = Average Propensity to Consume, APS=Average Propensity to Save

MPC=Marginal Propensity to Consume, MPS=Marginal Propensity to Save

What are the 2 main tools the government can use with fiscal policy?

What is the goal of expansionary fiscal policy and how is it achieved?

What is the current level of total public debt for the United States, and what percent is foreign-owned?

The following table is a consumption schedule. Assume taxes and transfer payments are zero and that all saving is personal saving.

(GDP = DI)	C	S	APC	APS
$1,500	$1,540	$_____	1.027	–0.027
$1,600	$1,620	_____	1.013	–0.013
$1,700	$1,700	_____	_____	_____
$1,800	$1,780	_____	0.989	0.011
$1,900	$1,860	_____	0.979	0.021
$2,000	$1,940	_____	_____	_____
$2,100	$2,020	_____	0.962	0.038
$2,200	$2,100	_____	_____	_____

Compute saving at each of the eight levels of disposable income and the missing average propensities to consume and to save.

1. The break-even level of disposable income is $________.

2. As disposable income rises, the marginal propensity to consume remains constant. Between each two GDPs the MPC can be found by dividing $________ by $________, and is equal to _______.

3. The marginal propensity to save also remains constant when the GDP rises. Between each two GDPs the MPS is equal to $________ divided by $________, or to _______.

goldreindeer163

Specific assignment: Mark each statement either True or False. If a statement is false, explain (very briefly) why it is false.

Keynes hypothesized that consumption is positively related to income. True

The marginal propensity to consume, MPC, is measured as changes in consumption over changes in income. True

The MPC is merely the percent of oneâs income that is spent to purchase goods and services. True

The MPC is the slope of the consumption function.

If the MPC is .8, then it may be concluded that the MPS must be .2.

If a personâs income is $10,000 and that person is spending $7,500 on consumption, then it may be concluded that that person has a marginal propensity to save of .25.

The MPC and the MPS must sum to one, meaning that 1 â MPC = MPS

Given a linear (straight-line) consumption function, the MPC must be a constant.

At the point graphically at which the consumption function intersects the 45-degree reference line, the MPC must be equal to 1.

If the consumption function lies above the 45-degree reference line, then there must be negative saving in the economy.

Autonomous consumption is that level of consumption spending that is independent of the level of income.

A change in the level of income will shift the consumption function either upward or downward.

A change in the level of consumer wealth will shift the consumption function either upward or downward.

If the MPC has a positive value, then the MPS must have a negative value.

Saving is defined simply as disposable income minus consumption.

If the consumption function has a slope of 4/5, then the saving function must have a slope of .2.

Any factor that would shift the consumption function upward would shift the saving function upward also.

The average propensity to consume (APC), like the MPC, is simply the slope of the basic, Keynesian consumption function.

Given a typical shaped consumption function, as the level of income rises, the APC rises as well.

If a consumption function graphically starts at a point above the origin (i.e., has a positive vertical axis intercept), then the saving function must begin below the origin.

A dramatic rise in household inflationary expectations could be expected to shift the consumption function downward and the saving function upward.

ECN 204 Chapter Notes - Chapter 10: Fiscal Multiplier, Real Interest Rate, Technological Change

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