Principles of Macroecomomics Essay Example | Topics and Well Written Essays - 1250 words

Principles of Macroecomomics - Essay Example295). Figure 1. Disposable income and MPC lineage Miles and Scott (2005, p. 295) It can be found in all textbooks in macroeconomics that the MPC is related with the Keynesian income multiplier. Fol wiped off(p)ing Mankiw (2009, p. 373-374), the Keynesian multiplier process begins when governance spends. For example, let us say that government spends ?20 billion (as mentioned earlier, Mankiws discussion used dollars not pounds). If the MPC is ? or 0.75 then the ?20 billion spent by government is received by society as factor payments of ?15 billion wherein, in turn, 75% of the ?15 billion are spent by those who received the payments. In turn, the factors who received the payment of 75% of the ?15 billion will spend ? of their income or 75% of 75% of ?15 billion and the chain goes on continuously. According to Mankiw (2009, p. 373), the process continually repeats and goes on indefinitely resulting into a total pass illustrated by evade 1. Table 1. MPC and multiplier resulting from sign government spending of ?20 billion Source Mankiw (2009, p. 373) Based on the above, from the Keynesian perspective, government spending multiplies or increases income received by society based on the bare(a) propensity to consume (Mankiw 2009, p. 373-374). Based on Mankiw (2009, p. 374), the multiplier based on the MPC can be derived as . The foregoing is equal to the following (Mankiw 2009, p. 274) . Economists are concerned with the MPC because the MPC is intimately related with the Keynesian income multiplier. It follows from the multiplier = 1/(1-MPC) that the higher MPC or the marginal propensity to consume, the higher the multiplier is. A low MPC implies a low Keynesian multiplier. As implied by our earlier discussion, Baumol and Blinder (2009, p. 160) discussion is similar but Baumol and Blinders take-off point for the concept of the marginal propensity to consume is disposable income rather than plain income. Disposable in come refers to that federal agency of income left after taking out taxes and the transfers payments received are added (Baumol and Blinder 2009, p. 157). Based on Baumol and ligature (2009, p. 157), at the macro level, disposable income or DI is DI = GDP - Taxes + Transfer payments = GDP - (Taxes Transfer payments) = Y - T. Miles and Scott (2005, p. 298) provides an provoke illustration of the Keynesian multiplier based on the modelling of the Keynesian perspective through the manipulation function. In Figure 2 below, the 45 degree line is the level where spending equals income while PEo is the sign level of spending by consumers, government, and investors. A rise in government spending leads aggregate spending to PE1 such that following the Keynesian perspective, an increase in income from Yo to Y1 results. Figure 2. Marginal propensity to consume and multiplier Source Miles and Scott (2005, p. 298) Miles and Scott (2005, p. 298) preferred, however, to say that the multiplier shows how much demand rises once all agents have adjusted to an outlet that generates a change in some component of demand. Following, this interpretation, it is important to study the MPC because initial spending by government or an increase in spending by any one or the consumer, government, or business can increase aggregate spending once all agents have adjusted to the initial increase in spending by any or all of the economic agents. Miles and Scott (2005, p. 299) even pointed out that the larger is the propensity to con