Learning Guide Unit 3

Written Assignment

1. What is the marginal propensity to consume when consumption changes from 7 to 6 and
disposable income changes from 5 to 3?

Formula

Marginal Propensity To Consume (MPC) = Change in Consuption (ΔC) / Change in Disposable Income (YdΔ)

Solution

MPC = ( 6-7 ) / ( 3-5) = ½

Answer

Marginal propensity to consume is 0.5

2. If disposable personal income is 10 and consumption is 12, what is personal savings?

What does this mean?

Formula

2. Personal Savings = disposable personal income - consumption

Solution

Personal Savings = 10 - 12 = -2

Answer

Personal Savings = -2, this means this person is spending beyond their disposable income
causing their savings to reduce by 2 units.

3. What is the multiplier when the change in the equilibrium level of real GDP in the
aggregate expenditures model is 9, and the change in autonomous aggregate
expenditures is 3?

Formula

Multiplier = Change in the equilibrium level of real GDP in the aggregate expenditures model
(ΔYeq) / Change in autonomous aggregate expenditures (ΔA)

Multiplier = ΔYeq / ΔA
Solution

Multiplier = 9 / 3 = 3

Answer

Multiplier is 3

4. What is the multiplier when the marginal propensity to save is 1/3?

Formula

Multiplier = 1 / Marginal Propensity to Save (MPS)

Solution

Multiplier = 1 / (⅓) = 3

Answer

Multiplier is 3

5. What would happen to the marginal propensity to save when a tax cut was enacted
causing the multiplier to change to 5?

Formula

Marginal Propensity to Save (MPS) = 1 / Multiplier

Solution

MPS = ⅕

Answer

Marginal propensity to save would be reduced to .2