Question

9. Suppose that my autonomous consumption=$35,000; disposable income=$12,000; and MPC=0.82. Solve for my marginal propensity to save.

10. Suppose that everyone in society has a MPC of 0.92. If the government spends $40,000,000, how much total spending would this create according to Keynes?

11. Suppose that I find $130 on the ground as I leave my office. I decide to treat myself and spend $80 on a lobster dinner and save the remaining $50. What is my MPC? Solve and then explain what your answer means.

12. Suppose the economy is currently in a recessionary gap. What does Keynes recommend should happen to fix this problem?

Answer 1

A - MPS = 1/MPC

= 1- 0.82

= 0.18

B - MPC = 0.92

Spending multiplier = 1/(1-0.92)

= 1/0.08

= 12.5

Totol change = 12.5 * 40000000

= $ 500000000

C - MPC = additional consumption / additional income

= 80/130

= 0.62

The MPC of 0.62 denotes that for every 1 unit increase in my income , I will consume 0.62 part of it , and the rest part will go into my saving . MPC denotes the change in the consumption resulting from the change in income

D - As per the keynsian approach , the fiscal policy of the increased government spending and decreased income taxes will help the economy to come out of the recessionary gap. The increase in spending will increase the investment and consumption in economy. The fall in taxes will increase the real disposable income. Both these tools will boost the AD of economy and help it to come out of recessionary gap.