Ch 4. - Intermediate Macroeconomics Chapter 4 Consumption Saving and Investment Exercises Review Questions 1 What is the MPC Answer The marginal

Ch 4. - Intermediate Macroeconomics Chapter 4 Consumption...

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1 Intermediate Macroeconomics Chapter 4. Consumption, Saving and Investment Exercises Review Questions 1. What is the MPC? Answer: The marginal propensity to consume (MPC) is the fraction of additional income consumed in the current period The marginal propensity to consume is always less than one because a part of the additional income is saved 2. How are desired consumption and desired saving affected by increases in current income, expected future income, and wealth? Answer: When a consumer gets an increase in current income, both current consumption and future consumption increase - Since current consumption rises, but by less than the increase in current income (MPC<1!), saving increases When the consumer gets an increase in expected future income, again both current and future consumption increase - Since current income does not increase, but current consumption does, saving decreases When the consumer gets an increase in wealth, both current and future consumption again rise - Again, there has been no increase in current income, so saving decreases
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