Mathematically Illustrated Marginal Propensity to Consumer Essay

Marginal propensity to consumer (MPC) and marginal propensity to save (MPS) and their relationship with the consumption function

Marginal propensity to consume is derived from the consumption function and is basically a derivative of consumption and disposable income of the consumers while the marginal propensity to save is usually an increase in the general savings level with respect to an increase in the disposable income. They can be mathematically illustrated as:

• MPC = ΔC/ΔY
• MPS = dS/dY

Where ΔC is the change in consumption, ΔY is the change in the amounts of disposable income and ΔS is the change in the amounts of saving in an economy (Irvin, p. 310).

In a liberalised two sector closed economy the MPS = 1 – MPC or MPC + MPS =1

Relationship between investment and the level of disposable income

Both investment (I) and consumption (C) are components of the income function (GDP) along other components like government expenditure (G) and net exports (NX) i.e.

Y = C + I + G + NX

Investments can be modelled as a function of both interest and income i.e. I = f(Y, r). Any increase in the income will boost the investment levels in an economy while a decrease is vice versa, thus can be seen when the formulae is manipulated (Irvin, p. 317).

Government borrowing and its crowd out private sector spending

Government borrowing can cause the interest rates to increase to a certain point where the corporate and individuals are unable to pay for the high interests charged this is referred to as the crowding effect. This tendency of borrowing is usually through issuing bonds to finance its spending. Governments usually fixe their interest rates and since they are usually high most lending facilities will opt to invest more on this bonds which are both profitable and more secure since the government cannot dishonour its pledges.

Difference between positive and normative economics

Positive economics is a branch of economics that deal with descriptive and explanation aspects while the normative economics is one that incorporates the judgements of the economists to identify a situation i.e. identify if the situation is desirable or undesirable to the economic environment. Positive economics is composed of more of micro economics theories while normative is more of macro economics.

Ways in which the knowledge of positive economics be useful in normative economics

Positive economics provides a base for normative economics in that it provides the framework under which the judgement is made and both have to be combined in the formulation of government policies (Irvin, 302). The descriptions and explanations in positive economics consists of theories designed to expand on economic problems which increases the understanding of economics in their judgements and policy formulations.

Keynesian economics, its impact on balanced budget amendment to the constitution have on our national economy

Keynesian macroeconomics generally refers to the macroeconomics found in The General Theory. It is an informal contextual treatment of macro issues similar to the informal contextual treatment of Classical economics. It rejects both Says Law and the Quantity

Theory of Money, and hence comes to different conclusions about macro policy than does Classical economics. It argues that under-full-employment equilibrium can exist. It incorporates some type of a multiplier process in the analysis, but does not relate that process to individual choices. It contends that fixed wages are not the cause of recessions or unemployment but does not formally show how, without that assumption, recessions and unemployment can exist. There are probably eight or nine different interpretations of Keynes’ ideas, so what Keynesian economics really is subject to dispute.

Keynesian economics advocate for government intervention in all the economic decisions in the economy. It advocated for a mixed economy and is characterised by neither a surplus nor a deficit. This school of thought argued that a deficit in the budget provides a stimulus in fiscal terms while a surplus provides a restraint. In the economy a balanced budget amendment would mean that there would be little or not stimulus to the economy thus slowing the economic growth and maintaining interests rates (Irvin, p. 303).

Ways to increase economic growth and its importance

Economic growth can be increases in the following ways (Irvin, p. 37);

1. A free and liberalized market environment has to be put in place to boost the price mechanism and the supply of money and investments in the economy to increase the output i.e. here the forces of demand and supply determine the market prices of goods and services.
2. Government spending should be limited and all the spending that the economic cost benefit analysis is negative should be stopped e.g. projects which will bring little stimulus to the economy as compared to others should be undertaken first, there should a priority analysis mechanism.
3. The currency in the economy should be stable for both local and foreign exchange trade. Measures to stabilize the currency are important to facilitate smooth trade.
4. Tax reduction measures should be advocated to increase the amounts of disposable incomes, saving and investments thus translates to increase in amounts of monies to invest thus economic growth rate is increased.
5. All barriers to trade and ownership of businesses should be eliminated to provide a smooth and enabling environment for both internal and foreign investments.

Ways in which a decrease in the interest rate will affect investment

Any decrease in the rates of interest will translate to an increase in the investments. Investments is modelled as a function of both interest and income i.e.

I = f(Y, r)

In the event of a fall in the interest rates the amounts of disposable income will increase as well as the amounts of saving. The increase in saving would mean that there will be also an increase in the investments in the economy.

Recession, how the lowering of consumption level increases its impact

Recession is a situation when the aggregate demand in the economy decreases. The reduction in ones consumption will contribute in the reduction of the aggregate demand in the economy and thus when you reduce the consumption level your chances of loosing your job increases in that the commodities or services you provide will be faced with a shortage of demand and most employers opt to retrench to stay afloat.

Basic philosophies of taxation fairness

These two basic philosophies include:

1. Ability to pay theory; this theory formulated the extent to which the population is able to pay the tax. Here there is a difference in the tax rates for different classes of the population, the luxurious commodities are taxed more.
2. Level playing field theory; in this theory the whole population is taxed the same not withstanding the level of wealth one owns.

Role the government should play in our lives and what goods and services it should provide are all directly related to how much tax revenue needs to be raised. We should all recognize, though, that our system of taxation is used for much more than raising revenue for the government. In fact, I would say that accomplishment of “social agenda” is the leading driver of federal tax legislation, followed by laws related to economic policy. Our tax system at the federal level in particular has become the agent of choice to influence individual and business behaviour. Taxes, what kind, on whom, how much, and the purpose of government are deeply intertwined.

Difference between capitalism and socialism

An economic system where the resources of an economy are privately owned is referred to as capitalism while the one where the resources are owned by the state is known as socialism (Irvin, 433). Capitalists economies is characterised by private ownership of property and businesses, competition etc. In these economies there is a disparity in the wealth of individuals unlike in socialism where the wealth is equally distributed.

Works cited

Irvin, B. Tucker. Economics for Today. 6 ed. USA: South-Western Cengage Learning. 2010.