Question

• How does income distribution effect consumption in the U.S.? Which income group would have the highest marginal propensity to consume? Should something be done to make income distribution more equal? Should there be a living wage? Do you agree or disagree with Professor Reich's view on income inequality? How would a more equitable income distribution affect aggregate demand?

Answer 1

Income distribution in the United States has a considerable impact on consumption. Households or consumers who fall in the higher-income category tend to save more and as such, they consume less as compared to the households or consumers who fall in the lower-income category. The consumers in the lower-income category have a lower propensity to save and such, they consume more. By the fact that lower-income earners have less disposable income, they will tend to save less and consume more. Hence, they have the highest marginal propensity to consume.

The government needs to do something to make the income distribution to be more equal. The government can introduce minimum wage policies since they are powerful instruments that can be used to affect the wage inequality experienced in the bottom half of the labor market. The policies may increase bottom wage and this will see family incomes rise without actually affecting employment. In conjunction with this, there should be a living wage in order to ensure that low-income workers are economically self-sufficient. This is important in that it can help individuals during job searching and in case they are fired due to various reasons to afford a living. This will further help to reduce the income distribution gap.

Income distribution that is more equitable affects aggregate demand in that it will enable the poor households to increase their consumption and hence stimulate aggregate demand. With an increase in aggregate demand, economic growth will increase.