11. Consider an economy with a marginal propensity to consume of 0.60. What woul

Question

11. Consider an economy with a marginal propensity to consume of 0.60. What would its marginal propensity to save be? What would happen to consumption income taxes (T) were to increase by 100, assuming that real aggregate income is unaffected? What would happen to private saving? To public saving? To national saving? Suppose, instead, that government purchases (G) increase by 100. Assuming that aggregate income is unaffected, what would happen to consumption? What would happen to private saving? To public saving? To national saving? a. b. (give the direction and size of the effect) if c.

Explanation / Answer

11)

a) the marginal propensity to save will be s = 1- MPC = 1-0.6

MPS = 0.4.

b) Given the aggregate income is unaffected the consumption = C’ +0.6(Y-T) will fall by 60 .

Savings will be (Y +T)0.6 = Savings will increase by $60.

Public saving will increase by $100..National saving will increase by $(100+60) = $160.

c) Consumption and private saving will remain same while public saving and national savings will go down by $100

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