Effect Of Consumption On Disposable Personal Income Essay

As we read in our text book this week the definition of the marginal propensity to consume is the ratio of the change in the consumption to the change in disposable personal income.(Rittenberg Tregarthen, 2009, p. 308) We can write it this way: MPC=Change in Consumption Divided by Change in Disposable Personal Income. (AmosWeb, 2014) Every household will have their own marginal propensity to consume, in macro economics we are not focusing on just one household but the economy as a whole. That is why we need a formula to calculate marginal propensity to consume henceforth referred to as MPC. Once we have determined MPC using the above formula, then we can calculate the amount that consumers will spend for every extra dollar earned. If for example, our MPC turns out to be 0.6 then theoretically, for every extra dollar a consumer receives, they will spend 0.6 percent or .60 cents. (Rittenberg Tregarthen, 2009, p. 308) When deciding on an fiscal spending policy the MPC will be very important to determine the potential growth to the economy. As seen in this consumption schedule this consumption schedule is based on a MPC of 0.75.( AmosWeb,2014) (in trillions of dollars) It is also safe to say, that MPC will always be less than 1 as there will some amount that people will save also referred to as Marginal Propensity to Save. As noted in our text book MPC plus MPS is always 1. (Rittenberg Tregarthen, 2009, p. 313) Multiplier Effect: Now that we have discussedShow MoreRelatedJohn Maynard Keynes Absolute Income Hypothesis1481 Words   |  6 Pagesmuch of macroeconomic consumption theory rests with John-Maynard Keynes’ Absolute Income Hypothesis, described in The General Theory of Employment, Interest and Money (1936). 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