Reference no: EM13224902
1. Assume that there are 200 families in a community. Each of these families spends exactly $100 plus one half its total income each week on consumption. Half (100) of these families are "poor;" they each receive weekly incomes of $200. The other 100 families are "rich;" they receive $400 apiece weekly
An increase in total consumption spending is desired in this community. To achieve the increase, it is proposed that rich families be taxed $100 apiece weekly and that the tax proceeds be given to poor families to spend. Thus, each and every family would have a net weekly income of $300.
The following justification is given for the tax: Poor families spend 100 percent of their incomes on consumption; they receive $200 in income, and they spend a total of $200. Rich families spend only 75 percent of their incomes; they receive $400, but they spend only $300. So the total consumption spending would be increased by redistribution of income.
Would such a proposal, if adopted, increase total consumption spending? Explain your answer in terms of the marginal propensity to consume.
Are there any different circumstances in which such a redistribution-of- income proposal would increase consumption spending? Again answer in terms of the MPC.
Explain two circumstances in which a redistribution of income through this tax scheme might actually lower consumption spending. (This is a hard question; think beyond the MPC notion that was sufficient for answering part b.)
Explain why, for most households, the MPC decreases with income.
Why does it not make sense for the national MPC to be greater than 1?
Briefly discuss the main determinants of investment spending in the
economy.
Explain the relationship between saving and economic growth.
Explain the relation between MPC and MPS.
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: they receive $200 in income, and they spend a total of $200. Rich families spend only 75 percent of their incomes; they receive $400, but they spend only $300. So the total consumption spending would be increased by redistribution of income.
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