Consumption Quiz

1)
multiplier = 1/1-mpc
1/ 1-.8 = 1/.2 = 5
50 billion x 5 = 250 billion
The multiplier is 5. When multiplied by 50 billion, it gives us the amount that RGDP would increase in the long run due to the initial injection of 50 billion due to investment spending. Therefore, RGDP would ultimately increase by 250 billion.


2) If disposable income were to remain stable, consumption could change if the marginal propensity to save or consume fluctuated. For example, if a family has the same amount of disposable income this year as last year, but this year they expect that great levels of inflation are going to occur, they may be more likely to spend their money now, before the dollar loses its value (in other words, their marginal propensity to consume has gone up because they have a greater incentive to spend). When MPC increases, consumption increases as well as people consume more.