Question

The recent COVID stimulus payments went to most Americans. Yes, a few with high incomes didn't get them, and there were a few other exceptions, but mostly, everyone got some cash from the government. The media portrayed this as a way for people to get by that were unemployed and couldn't work (because the virus closed their employer), or they lost their job. It was essentially a replacement for lost income. But, if that was the case, then why did retired people on Social Security get stimulus checks? Their income did not decrease or go away due to the virus. What do you think the effect (considering the multiplier) that the payments had on the economy? Is that why social security recipients and children also got payments? Let's hear your thoughts!

Answer 1

Answer:

Marginal propensity to consume (MPC) is the fraction of change in consumption to change in income or C/Y.

People with high income have low marginal propensity to consume because they already have much to consume and with increase in income they cannot increase their consumption very much. But people with low income have high marginal propensity to consume because they limit their consumption when income is low but with increase in their income they increase their consumption very much. For example with $100 increase in income, a person with high income may not increase its consumption (MPC=0) but a person with low income may increase its consumption by $90(MPC=90/100=0.9).

Multiplier is the factor that determines the increase in income(economic growth) with the increase in spending(consumption, investment, etc.). It is calculated as follows:

Multiplier=1/(1-MPC)

If MPC is high then Multiplier will be high. For example at MPC=0.9, Multiplier=1/(1-0.9)=1/0.1=10.

It shows that the income will increase by $10 with an increase in spending by $1.

Using all this information, it can easily be thought about that how at a time when production was limited, with the increase in the income of the people with low income(like senior citizens and children), their spending and hence the income of the economy was affected leading to lower economic loss to the economy.