Consumption Quiz

1. If policies were put in place to increase investment spending by $50 billion, what would be the potential effect on RGDP if mpc = .80? Explain.

Real GDP will continually increase as shown through the multiplier effect. RGDP eventually ceases to grow because as shown from the mpc, .20 of the money is saved which results in a leakage. .80 is spent and used on goods or services (consumption spending). The multiplier equation is M = 1/1-mpc. In this case mpc is .8, so the equation would be 1/.2, which would equal 5. Then this value is multiplied by the original investment spending of $50 billion, which would equal a RGDP growth of aproximately $250 billion.

2. If disposable income remains stable consumption can change due to wealth or expected changes in income. Wealth can mean having savings or property that is owned by a person. If someone has paid off the loan for their house, then they may be inclined to increase their consumption. If someone does not have a house, they may want to save me and not spend as much. Changes in consumption can also occur when expectations change. When someone expects to have an increase or decrease in income due to a promotion or a demotion, their consumption changes.

Inflation

Why is unexpected inflation a societal problem?

Unexpected inflation is a societal problem because the same money that is earned in a population cannot buy as many goods as it used to. If inflation is unexpected often times the wages of workers will not go up as inflation goes up, causing workers to have money that is worth less than the year before. This can result in an inability to pay for the increasing cost of living standards due to inflation. So items from food to toys will be too highly priced for workers to afford.

GDP

What does real GDP growth mean for you and me?

Real GDP growth means that the gross domestic product is increasing with inflation. This means that the economy is growing, and therefore there is more money in the pockets of consumers and producers. If the economy is growing you and me are better off because more money is going around and can potentially end up in our pockets. Individually different people can end up worse off, but the per capita GDP has increased, meaning that people are gaining more money or have more money than before.

Incentives: Black Rhinos

Why does the market for Black Rhinos create incentives that are different than other markets? Can these incentives be changed?

Black Rhinos are located in poor countries in Africa. The poacher's hunting these animals are trying to make enough money to feed their family. The horns of these Rhinos are extremely rare because the number of rhinos has shrunk from 30,000 in 1970 to 4,000 today. These horns can be sold for great sums of money in the black market, and be turned into handles on expensive knives. The incentives are different from other markets because the Rhinos are a communal source and nobody has control of the animals. No individual can own a Black Rhino and breed these Rhinos. Even the nastiest owner would not allow the decline of rhinos reduce to this level. These incentives can be changed if the Black Rhinos can be owned by an individual, and not be used by the community. The owner has his own incentives to keep the Rhinos alive for profit, whereas the community has no reason to protect this endangered species. 

Power of Markets

Discuss three significant ideas or arguments that Whelan is making about markets. Be specific and provide examples. 

          One of the arguments that Whelan makes relates to the greater market on a global scale. Many markets are intertwined and in the United States the policy does not extend to the amounts of importing and exporting a company can do. A company can try and make the most of their products by paying the cheapest amount to create a product. In a sense they are trying to make the most "bang for their buck". 

           Another argument that Whelan makes is on the policies of markets in different countries. Certain countries, like the former Soviet Union, are forced to sell their products at a certain price, no matter the demand of that item. In these types of countries there is no incentive to do better than other competitors because the price of the item cannot be changed by the seller. In countries like the United States there are incentives for wanting to be the better business. It drives business' to be competitive striving to make its store better than the others by reducing prices or creating better quality items. 

           One more significant argument that Whelan makes is about the difficulty to determine exactly what the causes are that bring good results. It is in inexact science, where it is extremely difficult for one to separate variables and clue in on one variable as the main cause for a certain effect.