Question

The accompanying table shows how consumer’s marginal propensity to consume in a particular economy are related to their level of income.

Income Range	MPC
$0-20,000	.9
$20,001-40,000	.8
$40,001-60,000	.7
$60,001-80,000	.6
$80,000 and above	.5

a) Suppose the government engages in increased purchases of goods and services. For each of the income groups in the accompanying table, what is the value of the multiplier?

b) If the government needs to close a recessionary of inflationary gap, which group should it primarily aim a fiscal policy of changes in government purchase of goods and services? Why? Explain carefully.

Answer 1

a)

Multiplier is the measure of change in national income due to a unit change in autonomous expenditure in the economy.

Multiplier= 1/(1-MPC)

Income Range	MPC	Multiplier
$0-20,000	.9	1/(1-0.9)= 10
$20,001-40,000	.8	1/(1-0.8)= 5
$40,001-60,000	.7	1/(1-0.7)= 3.33
$60,001-80,000	.6	1/(1-0.4)= 2.5
$80,000 and above	.5	1/(1-0.5)= 2

b.

If the government needs to close a recessionary or inflationary gap, it should primarily aim a fiscal policy of changes in government purchase of goods and services on people from income group of $0 to 20000. It is so because they are spending 90% of their income on goods and service. Here if government spends $100 in the economy then through the people of this income group the national income will increase by $1000 (10 times more) which makes it easier to came out of recession.

Generally savings are leakages of the economy which negatively have an impact onincrease or decrease in national income due to government spending and among all income group the least amount of savings will be held by the people of income group $0-20000. So there will be less leakage and more impact of fiscal policy.