Need help - What does an increase in CPI do to the MPC/MPS? (1 Viewer)

[turnitin]

Hey!
I have an assignment due tomorrow and I am almost done. I just wanted clarification on how an increase in the CPI affects the MPC/MPS. I think I know but I really want a definite answer!

Thank You!

 

[pikachu975]

I think MPC will decrease since products have gone up in price and hence MPS increases as consumption decreases. Not 100% sure since I just started economics but that's my opinion!

 

[turnitin]

I think MPC will decrease since products have gone up in price and hence MPS increases as consumption decreases. Not 100% sure since I just started economics but that's my opinion!

Nah, consumption increases as the prices increase; leaving not as much income to save as it is being put towards the extra costs. I hope that makes sense. I hope you have a great time in economics - I love it!

 

[sida1049]

I really enjoyed HSC economics (at the time). But looking back at it, it's a very flawed and obscure course. And this is a prime example of why: we can't actually say anything about the impact of increasing CPI on MPC, because we need more information, such as the wage growth rate relative to inflation. So really, we can't give you a definite answer or anything like that.

But what your reasoning sounds fair, and I agree; given that all other variables (e.g. wage growth, consumption patterns, et cetera) are equal, an increase in the CPI should raise the MPC as the average household must spend more for the same basket of goods.


Edit: oh boy I did a nasty typo (originally I wrote that "an increase in the CPI should reduce the MPC...")