Consumption Quiz

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

If investment spending increased by $50 billion this would add to RGDP and initially raise it. If the marginal propensity to consume was 0.80, than approximately 80% of the additional dollars would be consumed by society, therefore increasing RGDP.

2. If disposable income remains stable, how can consumption change? Explain.

Consumption can still change even if disposable income remains stable because of the savings. If disposable income remains constant but people decide to save less of their income, then more of it can go towards consumption. For instance, in a simplified model where disposable income is $10 and one spends $8, then $2 is saved. But consumption can increase to $9 if that person only saves $1.