Income choices What is disposable income?  What are the two ways it can be allocated?   What will a 2% increase in tax rates do to disposable income? If the MPS is .2, what is the MPC? If marginal propensity to consume is

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1. Income choices
   1. What is disposable income?  What are the two ways it can be allocated?
   2. What will a 2% increase in tax rates do to disposable income?
   3. If the MPS is .2, what is the MPC?
   4. If marginal propensity to consume is .64, what is marginal propensity to save?
   5. If Eduardo’s disposable income increases from $1,200 to $1,700 and his level of saving increases from minus $100 to a plus $100, his marginal propensity to save is:

2. Fiscal Policy
   1. What is Fiscal Policy and what is it used for?
   2. There are 2 types of fiscal policy tools that we discussed.  Name them both, and give a brief description of each.  (Include any subcategories.)
   3. Briefly discuss the effects of time lags in relation to fiscal policy. (i.e. what are some practical difficulties?)

3. There is a tax-cut that increases your Disposable Income by $3,400, which you intend to save $510.
   1. Calculate the MPC.
   2. Interpret this MPC. (What does it mean? Define MPC and describe in this context.)
   3. What is the resulting fiscal multiplier?
   4. Interpret the multiplier and describe the multiplier effect.
   5. Find the total change to the economy from this tax change.

4. If the marginal propensity to consume is 0.8 in an economy, a $20 billion rise in Incomes will do what to GDP? (Tell if it will increase or decrease GDP, and by how much.)

5. Suppose that the level of government spending increased by $100 billion where the marginal propensity to consume is 0.5. Aggregate expenditures must have increased by:

6. The Government has a $.8 Trillion Growth target.  What fiscal policy should they implement if MPS = .2?