(Transcript of audio with descriptions. Transcript includes narrator headings and description headings of the visual content)
(Speaker)
If the government has to close a recessionary or inflationary gap, should the government target the policy at the highest or lowest income groups?
(Description)
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? Explain. Table showing the marginal propensity to consume, income level and "bang for the Buck" is presented. Table has 3 columns - income range, marginal propensity to consume, "Bang for the Buck"; and it has 5 rows. The following data is in the table: income range - 0 to 20000 dollars, 20001 to 40000 dollars, 40001 to 60000 dollars, 60001 to 80000 dollars, and above 80000 dollars. Marginal propensity to consume - 0.9, 0.8, 0.7, 0.6, and 0.5. "Bang for the Buck" - 10, 5, 3.33, 2.5, and 2.
(Speaker)
We have highlighted the multiplier for the lowest income group - those with income less than 20000 dollars. You will notice the multiplier is largest for the lowest income group. This implies the greatest bang for the buck. If government was solely concerned about closing a recessionary or inflation gap with the least amount of change in government spending or taxes, it should focus policy on the lowest income group. Now, we have highlighted the multiplier for the highest income group - those with incomes greater than 80000 dollars. You will notice the multiplier is considerably lower - 2. Where every one dollar in government spending would change GDP by 10 dollars for the highest income group, it would only change GDP by 2 dollars. One assumption worth noting - we have implicitly assumed that spending will stay within each income group. It is likely that, as a lower income household receives an increased income, a portion of the spending generated by this increase will filter to higher income households. In reality the multiplier will be slightly smaller for the lower income groups and larger for the higher income groups.