Marginal propensity to save - Wikipedia
Marginal Propensity to Save: Formula & Relationship to MPC Quiz & Worksheet Goals can be saved or spent; Reading comprehension - ensure that you draw the most important information from the related lesson on the MPS formula. (This is the most important relationship that we study in this chapter.) The goal of contractionary fiscal policy is to reduce inflation. .. With our consumption and savings data we can calculate the MPC and MPS for each level of income. If MPC MPS, the tax multiplier is goal is full employment? c. . In equilibrium we have the following relationship: Y = C+Ig+Xn = 50 + Y +30 + 10 .
Assume that consumers of Lumpland behave as described in the following consumption function: Calculate the equilibrium level of GDP in Lumpland. Solve for equilibrium levels of Y, C, and S. Next, assume that the Republican Congress in Lumpland succeeds in reducing taxes by 20 to a new fixed level of Recalculate the equilibrium level of GDP using the tax multiplier.
Solve for equilibrium levels of Y, C, and S after the tax cut and check to ensure that the multiplier worked. What arguments are likely to be used in support of such a tax cut?
What arguments might be used to oppose such a tax cut? Higher GDP, higher employment, and saving. If the economy is running at or near full employment, it could overheat and cause inflation as you will see later. Question 3 Page For each of the following statements, decide whether you agree or disagree and explain your answer: During periods of budget surplus, government debt shrinks.
The debt grows only if expenditures exceed taxes. A tax cut will increase the equilibrium level of GDP if the budget is in deficit but will decrease the equilibrium level of GDP if the budget is in surplus. A tax cut will increase the equilibrium level of GDP whether the budget is in surplus or deficit. The only exception might be if the economy was at full employment.
Question 5 Page Expert economists in the economy of Yuk estimate the following: Assume that Yukkers consume 75 percent of their disposable incomes and save 25 percent.
Principles of Economics_Chap12_Mar15 | Anthony Yap - bornholm-sommerhus.info
You are asked by the business editor of the Yuk Gazette to predict the events of the next few months. By using the data given,make a forecast. Assume that investment is constant. They suggest cutting government purchases by 25 billion Yuks.
What effect would such cuts have on the economy? This would mean Y would decline to Question 7 Page Assume that inthe following prevails in the Republic of Nurd: What is likely to happen in the coming months if the government takes no action? What will the new levels of C and S be? What will be the new levels of C and S? How does your answer to part f differ from your answer to part e? This is not an equilibrium because spending is less than output Notice that there is no autonomous consumption.
Propensity to Consume and Save (With Diagrams)
In the coming months, we can expect output Y to decline and workers to be laid off. In this case, an increase in spending would occur since taxes are currently zero.
Spending exceeds output Yso in coming months we can expect output Y to increase. Spending is less than output Yso in coming months we can expect output Y to decrease. In part ethe government is stimulating the economy by increasing spending. In part fthe government is slowing the economy by increasing taxes. Question 10 Page Answer the following: What is the government spending multiplier?
What is the tax multiplier? If the government spending multiplier is 6, what is the tax multiplier? If the tax multiplier is -2, what is the government spending multiplier?
In general, anything that influences consumption or savings that is NOT disposable income will shift the Functions upward or downward. Any change in disposable income will move you along the Functions. Return to the course in I-Learn and complete the activity that corresponds with this material.
The Interest Rate — Investment Relationship The second component of aggregate expenditures that plays a significant role in our economy is Investment.
Remember from our lesson on National Income Accounting that investment only occurs when real capital is created. Investment is such an important part of our economy because it affects both short-run aggregate demand and long-run economic growth. The dollars spent on the investment have the immediate impact of increasing spending in the current time period. But because of the nature of investment, it has a long-term impact on the economy as well. If a company buys a new machine, that machine is going to operate, continue to produce, and will have an impact on the productive capacity of the economy for years to come.
This is in contrast to consumption purchases that do not have the same impact. If you buy and eat an apple today, that apple does not continue to provide consumption benefits into the future. Before the investment takes place, firms only know their expected rate of return. Therefore, investment almost always involves some risk.
Consider the following scenario. You know that your equipment is slow and outdated. You also know that investing in modern computerized printing presses will yield a positive return for your business, but that they will be very expensive. In order to undertake the investment in new equipment, you will have to borrow the money. Should you borrow the money and buy the new equipment?
The Relationship Between Marginal Propensity to Consume & Marginal Propensity to Save
What will influence you decision? The key variable that will help you to decide whether the investment makes sense for you is the real interest rate that you will have to pay on the loan.
If the expected rate of return in greater than the real interest rate, the investment makes sense. If it is not, then the investment will not be profitable. The real interest rate determines the level of investment, even if you do not have to borrow the money to buy the equipment. The Investment Demand Curve As was illustrated in the example above, the real rate of interest has an impact on determining which investments can be undertaken profitably and which cannot.
The higher the real rate of interest, the fewer investment opportunities will be profitable.
This inverse relationship between the real rate of interest and the level of investment is illustrated in the Investment Demand Curve shown below. As with the Consumption Function, there are factors that will shift the entire Investment Demand Curve. These are non-interest rate determinants of Investment.
While there are many things that can influence the level of investment in the economy other than the real interest rate, we will discuss only three. Business Taxes—The government can influence the level of investment by the tax structure they impose on businesses.