Questions: Consumption and Saving - End of Chapter Problem Real GDP per person falls during a devastating recession, which in turn causes consumption to fall by 5%. Would giving everyone 5% more income during the recession lead consumption to rise by 5%? Giving everyone 5% extra income would offset the 5% fall in consumption because people will spend of each extra dollar. a fraction all

The answer is: Giving everyone 5% extra income would not offset the 5% fall in consumption because people will spend a fraction of each extra dollar.

Explanation:

1. When real GDP per person falls during a recession, consumption typically decreases because people have less income to spend.
2. If the government or another entity gives everyone 5% more income, it does not necessarily mean that consumption will rise by 5%. This is because people tend to save a portion of any additional income they receive rather than spending all of it.
3. The marginal propensity to consume (MPC) is the fraction of additional income that a person spends on consumption. The rest of the additional income is saved.
4. Therefore, if people receive 5% more income, they will only spend a fraction of that additional income, not the entire amount. This means that the increase in consumption will be less than 5%.

In summary, giving everyone 5% more income would not fully offset the 5% fall in consumption because people will spend only a fraction of each extra dollar they receive.