The Consumption Function and the Marginal Propensity to Consume of the Top U.S. Income Quintile (2013)

Undergraduate: Veronica Clark

Faculty Advisor: Richard Froyen
Department: Economics

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One basic feature of macroeconomic theory is the multiplying effect that a change in one facet of spending can have on the total level of economic activity. This concept is based how a consumer spends and saves an increase in income and is measured through the marginal propensity to consume (MPC). Should the MPC differ in magnitude for various individuals and groups, policies affecting incomes will also affect the level of economic activity to differing extents. This paper uses the Consumer Expenditure Survey from the Bureau of Labor Statistics from years 1984 to 2011 to measure two different consumption functions for the total population and for each of the five quintiles of income distribution. The two models are each estimated using ordinary least squares and the method of seemingly unrelated regression to obtain estimated coefficients, and therefore both short run and long run MPCs and multipliers. Overall the MPCs show a decreasing trend among the groups as income increases. In many cases there is even a statistically significant difference between the MPCs of the fifth quintile and those of the first.