The Marginal Propensity to Consume

Questions: a. Describe what is meant by the marginal propensity to consume (mpc) and give its formula. b. Assume that GDP rises from $550bn to $650bn. Assume that this results in the consumption of goods and services rising from $340bn to $400bn. What is the mpc? c. Assuming that the domestic mpc remains constant, what will the level of consumption be if GDP rises to $700bn? d. If Australian consumption of goods and services is $400bn, investment is $120bn, government expenditure is $150bn, exports of goods and services are $140bn and imports of goods and services are $145bn, what is the level of aggregate expenditure (E)? e. Given your answer to (d), and assuming that GDP is currently $650bn, what will happen to GDP? Answers: (a). The marginal propensity to consume (MPC) refers as division of a total increment in pay that a customer spends on the utilization of products and in addition services, in preference to save it. Moreover, MPC plays a significant role in order to calculate the percentage of extra income that is used on consumption. MPC is an important component of Keynesian macroeconomic theory (Bilbiie Straub, 2006). Along with this, MPC is ascertained separating the adjustment in consumption by the change in income. In addition, the formula is as below: MPC = C / Y In this formula, C indicates the change in consumption, whereas Y points toward change in income (Gnos, Rochon, 2008). Hence, the formula is helpful to calculate MPC in an accurate and an appropriate manner. (b). MPC represents the changes in income because of changes in consumption. In the given question, GDP ascends from $550bn to $650bn. Moreover, the outcomes in the consumption of goods and services are ascending from $340bn to $400bn. The MPC is calculated as below: MPC = Change in Consumption / Change in GDP Change in Consumption = $400bn - $340bn = $60bn Change in GDP = $650bn - $550bn = $100bn MPC = $60bn/$100bn = .6 As a result; by considering all the given data the MPC is .6. (c). If the domestic MPC remains constant .6 and the GDP rise to $700bn then the level of consumption would be: = $700bn/ (1-.6) = $700bn/ (.4) = 1750 (d).Consumption of goods and services = $400bn Investment = $120bn Government expenditure = $150bn Exports of goods and services = $140bn Imports of goods and services = $145bn The level of aggregate expenditure AE = C + I + G + NX (Hubbard, Garnett, Lewis, 2012). = 400 + 120 + 150 + (140-145) = 665 At this point; C = Consumption: The household consumption over a specific time period. I = Investment: The amount of expenditure towards the capital goods. G = Government Expenditure: The amount of spending by governments (federal, state, and local governments). Government expenditure can take in infrastructure or else transfers that may increase the total expenditure in the economy. NX = Net exports: (Total exports- total imports). (e). Given answer to (d), and assuming that GDP is currently $650bn, and then the GDP will rise instead of fall or stay the same. The main reason behind it is that, according to the expenditure approach, aggregate expenditure is considered as a major part of GDP calculation. For that reason, if the aggregate expenditure will increase then it will increase the GDP in an automatic manner (Hubbard, Garnett, Lewis, O'Brien, 2014). Moreover, expenditure method is the most common method that is used in order to calculate GDP in an accurate manner. The formula for its calculation is given as below: GDP = C + G + I + NX On the basis of the above formula, it can be said that, the expenditure method involves aggregate expenditure to calculate the GDP. In this way, in this situation the GDP will rise. 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