19. Based on the news clip in Problem 16, explain what macroeconomic school of thought Treasury Secretary Timothy Geithner most likely follows?

The clip does not make totally clear Mr. Geithner’s views. He stated that “Washington needed to plant the seeds for business investment and exports.” If “planting the seeds” means cutting taxes to minimize their disincentive effects, then Mr. Geithner might follow the classical school. Much more likely, however, Mr. Geithner is recommending an active fiscal policy of tax cutting in order to combat the recession. In this case Mr. Geithner is following the Keynesian school.

Chapter 11

Use the following data to work Problems 1 and 2.

Disposable income	Consumption expenditure
(billions of pounds per year)
300	340
400	420
500	500
600	580
700	660

You are given the information in the table about the economy of the United Kingdom.

1. Calculate the marginal propensity to consume.

The marginal propensity to consume is the fraction of a change in disposable income that is consumed. In the United Kingdom, when disposable income increases by £100 billion per year, consumption expenditure increases by £80 billion per year. The marginal propensity to consume equals £80 billion ÷ £100 billion, or 0.8.

Disposable income	Saving
(billions of pounds per year)
300	40
400	20
500	0
600	20
700	40

2. Calculate saving at each level of disposable income and calculate the marginal propensity to save.

The table to the right shows the United Kingdom’s saving schedule. Saving equals disposable income minus consumption expenditure.

The marginal propensity to save is the fraction of a change in disposable income that is saved. In the United Kingdom, for each increase in disposable income of £100 billion, saving increases by £20 billion, so the marginal propensity to save is £20 billion ÷ £100 billion, which is 0.2.

3. The u.S. And China’s Savings Problems

Last year China saved about half of its gross domestic product while the United States saved only 13 percent of its national income. The contrast is even starker at the household level—a personal saving rate in China of about 30 percent of household income, compared with a U.S. rate that dipped into negative territory last year (–0.4% of after-tax household income). Similar extremes show up in the consumption shares of the two economies.

Source: Fortune, March 8, 2006

Compare the MPC and MPS in the United States and China. Why might they differ?

The MPC is (much) higher in the United States than in China. Correspondingly the MPS is (much) lower in the United States than in China. The MPC might be higher in the United States because the return to saving (and the cost of borrowing) is lower in the United States than in China. Additionally U.S. residents might be more confident about their futures and so willing to save less out of additional income than Chinese residents who might be less confident about their futures and so save more out of additional income.

Use Figure 11.1 to work Problems 4 and 5.

Figure 11.1 illustrates the components of aggregate planned expenditure on Turtle Island. Turtle Island has no imports or exports, the people of Turtle Island pay no incomes taxes, and the price level is fixed.