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Chapter 12: Q. c-For Critical Thinking (page 271)

In light of the above discussion, how is a greater degree of habit persistence in consumption likely to affect the marginal propensity to save? Explain your reasoning.

Short Answer

Expert verified

The proportion of a rise in revenue that is saved rather than spent on consumption is known as marginal propensity to save. The MPS fluctuates according on one's income level.MPS is more common among those with greater earnings.

Step by step solution

01

Marginal Prosperity to Consume.

The marginal propensity to consume is defined in economics as the proportion of an aggregate increase in pay that a consumer spends on goods and services rather than conserving it.

02

Consumption habit development.

A condition connecting the strength of habits to the evolution of consumption through time is implied by the habit formation model. When food is used to assess the condition. Information from the Panel Survey on Income Dynamics on consumption.

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Most popular questions from this chapter

Identify the primary determinants of planned investment

At an initial point on the aggregate demand curve, the price level is 125 , and real GDP is \(18 trillion. When the price level falls to a value of120 , total autonomous expenditures increase by \)250 billion. The marginal propensity to consume is 0.75. What is the level of real GDP at the new point on the aggregate demand curve?

At various times in the past-the early 1980 s, early 1990 s, early 2000 s, and late 2000 s-business profit expectations plummeted, and firms cut back on their investment spending. The ratio of total investment spending to companies' aggregate profit flows decreased markedly. In each instance, real GDP declined, and the U.S. economy fell into recession. At the end of the recession intervals of the early 1980 s, early1990 s, and early 2000 s, business profit expectations improved. Firms responded by boosting their investment spending, and both real GDP and the ratio of investment expenditures to firms' profits recovered fully. At the conclusion of the late-2000s recession, however, this ratio failed to return to its previous level. By the time you have completed this chapter, you will understand why the result during this current decade has been a sluggish improvement in real GDP and, hence, an unusually slow economic recovery.

Evaluate why autonomous changes in total planned expenditures have a multiplier effect on equilibrium real GDP

The marginal propensity to consume is equal to 0.80. An increase in household wealth causes autonomous consumption to rise by 10billion. By how much will equilibrium real GDP increase at the current price level. other things being equal?

Assume that the multiplier in a country is equal to 4and that autonomous real consumption spending is\(1trillion. If current real GDP is\)18trillion, what is the current value of real consumption spending?
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