marginal propensity - Choices of Policy Ppl who believe...

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Choices of Policy Ppl who believe gov’t is too big support tax cuts to close recessionary gaps & spending cuts to close inflationary gaps Ppl who think private sector doesn’t provide well support gov’t purchases to close recessionary gaps & tax increases to close inflationary gaps Supply –side economics – the school of thought that promotes the use of fiscal policy to stimulate long-run agg supply o Advocate reducing tax rates in order to encourage ppl to work more or more individuals to work & provide investment tax credits to stimulate capital formation o Favor tax cuts over increases in gov’t purchases or transfer payments Also must decide on how to stimulate economy – what expenditures? Chapter 13: Consumption & Aggregate Expenditures Model Disposable income = income households receive – taxes (income available to spend) Consumption function = relationship between consumption & disposable personal income Marginal propensity to consume (MPC) = the ratio of the change in consumption (delta C) to the change in disposable income (delta Y d ) Personal saving – disposable personal income not spent on consumption during a particular period Personal saving = disposable personal income – consumption Saving function – relates personal saving in any period to disposable personal income in that period Marginal propensity to save (MPS) – ratio of the change in personal saving (delta S) to the change in disposable personal income (delta Y d ) MPC + MPS = 1 Consumption income hypothesis – consumption in any one period depends on income during that period, or current income
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