What is the marginal propensity to consume (MPC) and why is it important in predicting consumer behavior?
The marginal propensity to consume is the ratio of the change in consumption spending to the change in disposable income. The value of the MPC typically is less than one because when consumers receive an increase in income, their spending does not increase as much as income. For the United States, statistical estimates yield an MPC of approximately 0.95 . If one knows the MPC, then predictions can be made of how much consumer spending will increase when disposable income increases by a certain amount. This is especially useful with regard to tax changes. If the federal government intends to increase aggregate demand through decreasing taxes, then knowing the MPC is necessary. For example, if the desired increase in consumer spending is $475 million and the MPC is .95, then taxes must be reduced by $500 million.
You might also like to view...
Hyundai is a large South Korean company that produces finished steel products. Hyundai plans to buy raw steel from U.S. Steel. As a result, the demand curve for U.S. Dollars ________ and the demand curve for South Korean Won ________
A) shifts rightward; does not shift B) shifts rightward; shifts leftward C) does not shift; shifts leftward D) shifts leftward; shifts rightward
Identify the correct statement
a. National income accounting measures only the flow of output between different sectors of an economy. b. National income accounting summarizes the level of production in an economy over a decade. c. National income accounting explains diagrammatically the flow of goods and services and of money expenditures (income). d. National income accounting summarizes and categorizes the productive activity in an economy over a year. e. National income accounting measures the total money supply in an economy.
When Hurricane Katrina hit the Gulf Coast of the United States in 2005 it destroyed 5,000,000 acres of timber. Given that lumber is timber that has been sawed or split into planks and boards, explain in terms of supply and/or demand how the hurricane
impacted each of the following markets (be sure to note the expected resulting impact on equilibrium price and quantity): a. Domestic lumber b. Imported lumber c. New home construction
The main problem we had during the Great Depression, said John Maynard Keynes, was inadequate ________.
Fill in the blank(s) with the appropriate word(s).