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Question 1 of 2

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The accompanying table shows how consumers’ marginal propensities to consume in a particular economy are related to their level of income.

Income range Marginal propensity to consume
$0–$20,000 0.9
$20,001–$40,000 0.8
$40,001–$60,000 0.7
$60,001–$80,000 0.6
Above $80,000 0.5
Table

Suppose the government engages in increased purchases of goods and services. For each of the income groups in the table, what is the value of the multiplier—that is, what is the “bang for the buck” from each dollar the government spends on government purchases of goods and services in each income group?

Income range Marginal propensity to consume “Bang for the Buck”
$0–$20,000 0.9
$20,001–$40,000 0.8
$40,001–$60,000 0.7
$60,001–$80,000 0.6
Above $80,000 0.5
Table
The “bang for the buck” of an additional $1 of government purchases of goods and services for a consumer in each income range is calculated as 1/(1 − MPC).This is the same as the income multiplier. For further review see section, “Fiscal Policy and the Multiplier.”
Suppose the government engages in increased purchases of goods and services. For each of the income groups in the table, what is the value of the multiplier—that is, what is the “bang for the buck” from each dollar the government spends on government purchases of goods and services in each income group?
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      Income range Marginal propensity to consume “Bang for the Buck”
      $0–$20,000 0.9 10
      $20,001–$40,000 0.8 5
      $40,001–$60,000 0.7 3.33
      $60,001–$80,000 0.6 2.5
      Above $80,000 0.5 2
      Table

      If the government needed to close a recessionary or inflationary gap, at which group should it primarily aim its fiscal policy of changes in government purchases of goods and services?
      Since the “bang for the buck” is highest for the lowest income group, fiscal policies aimed at that income group would require the smallest change in government purchases of goods and services to close a recessionary or inflationary gap. For further review see section, “Fiscal Policy and the Multiplier.”
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