Question

Lucas’s work throughout the year has provided his employer excellent value and as a reward his employer gives him a bonus of $2,000. Lucas is very excited and plans on spending part of the bonus but he also would like to save some money. Ultimately, he decides to spend $800 of his bonus and save the remainder.

7. Show your work and calculate Lucas’s Marginal Propensity to Consume (MPC).
8. Show your work and calculate Lucas’s Marginal Propensity to Save (MPS).
9. Outline and explain the four factors that determine MPC.
10. Calculate the Multiplier if the economy has the same MPC as Chase.
11. Interpret the Mulitplier.

Answer 1

g) MPC is change in consumption divided by change in disposable income

Here income is increased by 2000 and consumption is increased by 800

Hence MPC is 800/2000

= 0.40

h) MPS is (1 - MPC)

= (1 - 0.4)

= 0.6

i) MPC is influenced by disposable income and in turn it is influenced by tax rate, interest rate, market conditions, amount of wealth

j) Multiplier is 1/MPS = 1/0.6 = 1.67

k) It shows how much GDP changes when autonomous expenditure is changed by one dollar