If when Jenny's income increases from $16,000 to $20,000, her consumption spending goes from $15,000 to $18,000, her marginal propensity to consume is?

Marginal propensity to consume is, by definition, the change in consumption spending divided by the change in income which caused it; or in other words, the fraction of each extra dollar of income spent on consumption. So in this case,

Change in consumption = $18,000 - $15,000 = $3,000

Change in income = $20,000 - $16,000 = $4,000

MPC = marginal propensity to consume = 3,000/4,000 = 3/4 = 0.75
 
 
 
 

For questions 1 through 3, for the event listed on its own, in a Keynesian framework indicate whether the effect would be to

(a) increase, (b) decrease, or (c) leave unchanged,

equilibrium output and employment:

1. Responding to exhortations to match the Japanese, US households plan to save more.

(b) If US households plan to save more, they are planning to consume less; so planned Aggregate Expenditure will decrease, the equilibrium level of output and employment will decrease (because in the Keynesian framework, it is determined by equality between planned expenditure and actual output; so long as capacity is there, we have a quantity adjustment, not a price one).

2. Starting from a position of excess capacity and unemployment, government spending is increased.

(a) Government spending on goods and services, G, is part of Aggregate Expenditure, AE = C + I + G + (X -M). So Aggregate Expenditure increases, so -- because we are told there is excess capacity -- do equilibrium output and employment.
 
 

3. An increase in income tax rates.

(b) If income tax rates go up, most people will expect to have less disposable income -- i.e. income left over to spend on consumption or save after they have paid their taxes. So one would expect planned consumption spending to go down, i.e. AE goes down, i.e. equilibrium output and employment go down.