Question

1.a) The Federal Reserve of St. Louis's web page includes statistics on real disposable personal income at DSPIC96 <http://research.stlouisfed.org:80/fred2/series/DSPIC96?&cid=110> and on real personal consumption expenditures at PCEC96 <http://research.stlouisfed.org/fred2/series/PCEC96?&cid=110>. Go to these pages and calculate the marginal propensity to consume by comparing the same month of two consecutive years, such as March 1998 and March 1999.

For example, I would calculate the marginal propensity to consume using March 1998 and March 1999 as follows

Subtract real personal consumption for March 1998 from March 1999.

Subtract real disposable personal income for March 1998 from March 1999.

Divide the value you found in step 1 by the value you found in step 2.

IMPORTANT: If the value you calculated in step 1 or in step 2 is negative, then choose different time periods.

What months did you choose and what was the marginal propensity to consume? Also, please show how you derived the marginal propensity to consume, that is, show your calculations.

Hints: To find the data needed to answer this DQ, click on the DOWNLOAD button located above the right side of the graphs. The marginal propensity to consume is simply the change in real personal consumption expenditures divided by the change real disposable personal income.

b) Given the marginal propensity to consume that you calculated in part "a," what was the simple spending multiplier for the time period you chose? Using this simple spending multiplier, how much would GDP increase if planned spending increased by $100 billion?

Answer 1

For the purposes of calculation, I have considered the data for Dec-2016 and Dec-2017.

a. Real Disposable personal income in Dec-2016: 12569.9

b. Real Disposable personal income in Dec-2017: 12846.3

c. Real personal consumption expenditure in Dec-2016: 11740.1

d. Real personal consumption expenditure in Dec-2016: 12080.5

Marginal Propensity to Consume(MPC) = (d-c) / (b-a)

i.e.,Marginal Propensity to consume = (12080.5-11740.1)/(12846.3-12569.9) = 1.2315

Answer for b.) spending multiplier is calculated as 1 / (1-MPC) = 1 / (1- 1.2315)=-4.3

Since the spending multiplier is negative, there will be a decrease in GDP to the tune of 431.87 billion.