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.