Consumption Quiz

1)  50,000,000,000[1/(1-.80)]= 250,000,000,000
       This exemplifies the multiplier effect.  That original investment spending will increase the income of others by a certain amount.  Using the same marginal propensity to consume, they would then spend 80% of that, and so on, until the the remaining money is saved up.  MPS=.2.

2)  Consumption can change due to two major determinants.  Future Expectations and Wealth.  If one expects to have an increased income in the future, then they will spend more now in anticipation of attaining more money in the future, so they don't have to save now.  If one is wealthier now, meaning they own more value (real estate, stocks, etc.), then they are not worried much about saving for the future.  Therefore, they will justify spending more now.