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Impact of Income Distribution on Aggregate Consumption
An economy consists of two groups of households: High-Income and Low-Income. High-Income households have a marginal propensity to consume of 0.4, while Low-Income households have a marginal propensity to consume of 0.9. Consider two different scenarios where total national income increases by $100 billion.
Scenario A: The $100 billion in new income is split evenly, with $50 billion going to each group. Scenario B: The $100 billion in new income is distributed with $20 billion going to High-Income households and $80 billion going to Low-Income households.
Calculate the total increase in aggregate consumption for both Scenario A and Scenario B. Based on your calculations, explain why the total change in consumption is different between the two scenarios despite the same total increase in national income.
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