Marginal propensity to consumer (MPC) and the marginal propensity to save (MPS)
To begin with Marginal propensity to consume is actually defined as the proportion of any additional income that a consumer uses or spends in consumption. In economics this is normally expressed in form of decimals and ranges from zero to one. According to Keynesian theory of consumption people with high income have a lower MPC compared to people with low income because such individuals tend to consume more since they don’t care about saving which actually in the end reduces their levels of savings or investments. On the other hand Marginal propensity to save is actually defined as the ratio of any supplementary proceeds that an individual use as investments. In economics this is usually expressed as a decimal ranging from zero to one as the ratio of change in savings to change in income. It is induced savings since it relies on the level of income. People with high income have a higher MPS compared to people with low income. Both MPS and MPC sum up to one.
MPS + MPC = 1(Tucker, p.56).
Relationship between investment and the level of disposable income
Consumption function is a very important tool which in economics is used to analyse consumer spending and mainly it is normally expressed as a mathematical function. The relationship between MPC and consumption function is that MPC is the gradient of the consumption function. This gradient is assumed to be positive hence expressing a positive relationship between income level and consumption. Moreover, according to the studies done by (Tucker, p.56), consumption increases with an increase in the levels of income which indicates that the more an individual ears the more he or she spends or consumes hence this coincides with the theory of Keynesian that state the more the income the more the consumption levels. In order to evaluate the changes in consumption, the consumption function is normally used to show the rate at which consumption levels will change when income levels changes (Tucker, p.56).
According to the definition stipulated by Tucker,( p.56),disposable income is a term which describes the total income which a consumer can spend or save from the total earnings. In economics, this refers to total earnings including remunerations, salaries, company profits, transport payments from the government, trade transfer payments, interests gained and dividends. Personal income taxes and compulsory social insurance contributions have to be subtracted thus we are left with the disposable income. Give the fact that disposable income can either spent or saved, Keynesian theory of consumption states that an increase in income levels leds to reduced levels of consumption. This actually in the end enables the consumer to save more than he or she consumes as these savings in the end an individual or consumer normally invests them leading to an increase in investments (Tucker, p.72).
How government borrowing causes crowding in the private sector spending
Crowding out can be described as the process whereby the government borrows large amounts of money leading to a reduction in the money available for lending. Crowing therefore is usually associated with certain increases in the level of interest rates which eventually leads to high costs when it comes to accessing credit. This has an effect on firms which operates in the private sector as mostly it leads to low credit ratings since this situation causes decreases in the government borrowing hence decreasing the amount of money circulation in the economy. When there is a shortage in money circulation this automatically leds to an increase in cost of credit access as a result of high interest rates being charged by the lending financial institutions. This results to unwanted constraints in the private sector due to credit unavailability causing crowding out in the private sector spending.
Difference between positive and normative economics
According to the definition stipulated by Tucker (p.66), Positive economics is a term which actually explains how the economy operates and why it operates in that particular manner. In other words positive economics’ actually deals with facts other than opinions. To illustrate a good of example of positive economic as well as how it is normally used in the daily lives we can use a practical example of a positive economics example such as ‘Industries contributed 25% too the GDP in the last financial year.’ This statement can be accepted or rejected after being subjected to scientific methods to verify its truth value. On the other hand, normative economics explain how the economy ought to be other than how it is. Furthermore, it has its concerns on majors, opinions and value judgement hence it cannot be scientifically verified. In order to generate evidence of this kind of economies we use a simple type of a normative statement is such as ‘The government should work on reducing taxes?’ Here Positive economics tends to give the mechanism in depth on how the economy functions while normative economics just recommends the ways to follow in pursuing the economic mechanisms (Tucker, p.72).
Keynesian economics and the impact of a balanced budget on the national economy
A constitutional amendment would intensify pressure on evasion strategies since when an activity is not given a provision in the budget there is a big possibility of it growing out of government control. Additionally, it is always associated with technological performance problems since the total expected outlays are in really sense not supposed to be more than the expected total receipts which actually leads to the growth restrictions as well as restrictions in the national income increase. Moreover, some problems tend to arise in situations where budget plans are based on estimations this normally leads to short term changes.Furthermore, the constitution is believed to give more powers to the government when it comes to the performance of some governmental functions.
What nation can do to increase its economic growth?
For economic growth its is always necessary for an individual nation to promote domestic trade and industry,. Additionally, nations should always strive to ensure they allow the development of monopolies in the economy as this acts as an incentive for investment, new technology invention, improved infrastructure, offers on copyrights among other issues. Additionally, as way of increasing investor confidence then it is always necessary for the nations to maintain a stable political system by increasing the levels of security. Economic growth therefore is seen to be a major goal for any particular nations as it is always associated with economic freedom, security, full employment and stability in a country. Moreover, economic growth is much beneficial to the nation since it associated with improved standards of living which in the end bring about prestige to leaders or a citizen of a country that is economically stable. Most investments are funded by credit as the availability of credit depends on the interest charged by the financial institution. This actually implies that the cost of borrowing money is highly dependent on the money supply in an economy.
How a decrease in the interest rate affects investment
According to studies done on the effects interest rates changes it indicates that when there is a decrease in interest rates it means that there is a reduction in the cost of borrowing money from the financial institutions. This situation leads to reduced levels of credit as low interest rates acts as an incentive for investment as many investors always take advantage of the situation where they tend to invest at low interest but sell the investments at high prices resulting to high profits. This implies that a decrease in the level of interest rates leads to liquidity shortages creating more room for investment as many individuals will opt to borrow from outside hence encouraging more investments.
Effects of recession on employment
Recession can be described as an economic period when the economy experiences low interest rates and high levels of unemployment hence lowering consumption levels in this period automatically enables at consumer to save more. Moreover, reduced levels of consumption usually lead to increased rates of individual savings hence increase the level of consumer investments. The stability and financial freedom that the consumer attains during this period result to increased probability of the consumer losing the job, which will mainly be a personal decision by the consumer.
Two basic philosophies of taxation fairness
The two underlying basic philosophies of taxation fairness are Level playing field theory which actually states that every person either rich or poor is subjected to the same tax rate. This philosophy therefore takes care of the people who are not in either of the extremes but hey are middle class earners. The second philosophy is Ability to pay theory which importantly states that a person is supposed to pay tax for which is able to afford to pay. This means that the rich, the poor and the middle class earners have a different tax rate from each other (Tucker, p.72).
Differences between capitalism and socialism
According to a research by Tucker (p.70), Capitalism is an economic system hereby the resources in that economy have a private ownership and every one has to work to get wealth., while in a socialism resources are owned by the state and wealth is distributed equally. There are class struggles in capitalism due to in equality while in socialism people are more equal. In capitalism labour is sold to employers while in socialism every one works for everyone else’s good (Tucker, p.78).
Works cited
Tucker, Irvin, B. Economics for Today, pp.56-78.6th ed. Boston: South Western Educ Pub, 2008