Personal Income and Its Disposition - Research Paper Example

Marginal Propensity to Consume or MPC shows the relationship between the change in consumption and change in income (Baumol and Blinder 535). Thus, I computed MPC by dividing the change in Nominal Personal Consumption Expenditures by the change in Nominal Personal Disposable Income (MPC= change in Nominal Personal Consumption Expenditures/ change in Nominal Personal Disposable Income). And to get the changes in both the Nominal Personal Consumption Expenditures and Nominal Personal Disposable Income, I utilized the figures provided for the 1st and 2nd quarters of 2011 (MPC = Nominal Personal Consumption Expenditures 2nd quarter 2011- Nominal Personal Consumption Expenditures 1st quarter 2011/ Nominal Personal Disposable Income 2nd quarter 2011 - Nominal Personal Disposable Income 1st quarter 2011).

Substituting the figures in this formula, change in Nominal Personal Consumption Expenditures ($10 676B- $10 571.7B) is equal to $104.3B and change in Nominal Personal Disposable Income ($11 591.5B- $ 11 481B) is equal to $110.5B. Dividing the changes ($104.3B/ $110.5B), MPC is equal to 0.94. Without long computations and just using the economic formula, MPC + MPS = 1, I can infer that Marginal Propensity to Save or MPS is 1- 0.94 or simply 0.06. To check my answer, I performed the long computation.

Marginal Propensity to Save or MPS tells us about the relationship of change in savings and change in income. It is computed by dividing the change in Nominal Personal Savings by the change in Nominal Personal Disposable Income. Again, I used both the figures provided by the table for the 1st and 2nd quarters of 2011. Change in Nominal Personal Savings is equal to Nominal Personal Savings 2nd quarter 2011- Nominal Personal Savings 1st quarter 2011. Substituting the figures, $588.9B- $578.9B, results in a change of $10B.

After dividing this change by the change in Nominal Personal Disposable Income of $110.5B, MPS is equal to 0.09. Average Propensity to Consume (APC) is computed by using almost the same formula with MPC, the difference is rather than using changes in consumption and income, this time total consumption and total income will be used. This means that Nominal Personal Consumption Expenditure 2nd quarter of 2011($10 676B) will be divided by the Nominal Personal Income 2nd quarter of 2011($12 922.6B).

This results in an APC of 0.83. Average Propensity to Save (APS) also uses the same rule as APC in its computation. It is determined not by using the changes in savings and income but by the total income and savings. Therefore, dividing the Nominal Personal Savings of 2nd quarter of 2011 which is $588.9B by the Nominal Personal Income of 2nd quarter of 2011 which is $12 922.6B, APS is equal to 0.05. Recessionary gaps are closed by the governments by means of fiscal policy. This comes in either changing the government spending or changing the taxes or changing both the government spending and taxes (Baumol and Blinder 559).

In this case, if fiscal policymakers will close the recessionary gap of $17.38B by changing the government spending, there should be an increase of $1.04B.