Assume there are 400 families in a community. Each of these families spends exactly $100 plus one-half of its total income each week on consumption. Half of the 400 families are considered poor-they each receive incomes of $200/week. The other half of the families are considered rich-they each receive incomes of $400/week.
You want to increase total consumption in the community and propose to achieve this goal by taxing the rich families by $100/week and distributing the tax proceeds to the poor families to spend. As a result, each family in the community would have a net weekly income of $300.
1. Based on the assumption that each family spends $100 plus one-half of its total income each week, what is the total weekly consumption spending of a poor family prior to instituting the tax? What is the total weekly consumption spending of a rich family prior to instituting the tax?
2. Again, following the assumption that each family spends $100 plus one-half of its total income each week, what is the total weekly consumption spending of a poor family after implementing your tax plan? What is the total weekly consumption spending of a rich family after implementing your tax plan?
3. Thinking in terms of the marginal propensity to consume concept, would your proposal increase total consumption spending?
4. Again, thinking in terms of marginal propensity to consume, under what circumstances would your tax proposal increase total consumption spending?
5. What other policies could be enacted to increase total consumption spending?