Chapter 12, Problem 11P

To determine

a) The marginal propensity to save

b) The change in planned expenditure due to the decline in price level

Concept introduction:

MPC: Marginal propensity to consume is the percentage of the additional unit of currency that is consumed when the individual earns one more unit of currency.

Multiplier: K = 1 / (1-MPC) = 1 / MPS, where K is multiplier

Relationship between MPS and MPC: MPS + MPC = 1, MPS = 1 − MPC, MPC = 1 - MPS

Consumption: Portion of the consumed by the Individual.

As, Y = C + I + G, where Y stands for GDP, C for consumption, I for investment, G for government expenditure. Not taking net exports just for simplicity.

Also, Consumption (C) = Autonomous consumption + {MPC x (Income (Y) − Taxes (T))}