Question

1. Now, let’s look at the effect of difference in MPC.
   1. Fill out the following table (your answer for all Italians should come from question 1)

Effect of Difference in MPC

	Marginal propensity to consume	Multiplier on government spending
All Italians	.52	2.08
Group 1	.3	1.43
Group 2	.65	2.86

2. Discuss the differences in multipliers. In words (not math!), how does the MPC relate to the multiplier?

3. Group 1 and Group 2 are two mutually exclusive collections of people in the Italian economy that have different consumption habits (this could be based on geography, age, income level, education, et) Make an educated guess (or read the paper itself!) about who belongs to each group. Then explain your reasoning.

Answer 1

A) As shown in table that due to difference in the MPC there is change in the multipliers. And as we know that there is direct relation between multiplier and MPC, then this states greater the value of MPC more will be the multiplier value and lesser the value of MPC; lesser will be the multiplier.

B) As multiplier is defined as rate of change in consumption over change in income.

Now, greater the MPC will mean that consumption is more which leads to more AD and hence, the multiplier value will be more.

Now,greater the multiplier means more will be the increase in the income on every small change in the investment.

MPC is directly related to the multiplier.

3) Group 1 have less MPC which shows that Group 1 is more rich. Because MPC for rich class is always less than the MPC for the poor class.

And, MPC is relatively higher for Group 2 which shows that Group 2 is more poor relatively.