Unit 5 Assignment BU204 Income and Expenditure

Income and Expenditure

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This assignment deals with marginal propensity to consume, the multiplier effect and how they affect the overall economy.

1. Explain how each dollar spent by consumers throughout the economy ultimately comes back to people in the form of the following:

a. Rent as it relates to natural resources. 

b. Interest as it relates to loanable funds.

c. Dividends as it relates to business investment.

d. Wages and salaries.

2. Define marginal propensity to consume (MPC) and the multiplier (M).

3. Each term (3 months) the current group of economics students completed a questionnaire as to how much they would spend on new purchases compared to how much they would save/pay off bills, if they suddenly and unexpectedly received a check for $1,000. The average MPC is shown in the table below.

Month in which student poll was taken

Average of students’ responses as MPC

March

0.41

June

0.30

September

0.22

December

0.56

a. What do these MPC’s imply about the students’ thinking over the course of the year?  

b. What is likely happening in the economy during the same period of time?

4. Explain how MPC and the multiplier effect would impact a government’s attempt to stimulate its economy in each of the following scenarios. 

a. To stimulate the economy already in a serious recession, the government spends a total of $700 million to send each person a stimulus check of $600.

b. To stimulate the economy already in a serious recession, the government spends a total of $700 million to construct nationwide highspeed internet infrastructure so that all areas of the country, especially the rural areas will have highspeed internet service. 

c. Explain why one of these scenarios is likely to have a greater overall impact on this economy.  

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