Principles of Economics (12th Edition)
12th Edition
ISBN: 9780134078779
Author: Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher: PEARSON
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Chapter 23, Problem 1.4P
To determine
Aggregate consumption, consumption and saving function and
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Make a graph based off the following:
Construct a consumption function from the data given here and determine the MPC.
Consider the hypothetical country of Kejimkujik. Suppose that national income in Kejimkujik is $300 billion, households pay $100 billion in taxes, household consumption is equal to $160 billion, and the marginal propensity to consume (MPC) is 0.6.
On the following graph, use the blue line (circle symbol) to plot the economy's consumption function.
Consumption Function050100150200250300350400450500500450400350300250200150100500CONSUMPTION (Billions of dollars)DISPOSABLE INCOME (Billions of dollars)
Suppose now that Kejimkujik’s national income increases to $330 billion. Assuming the amount paid in taxes is fixed at $100 billion and that MPC = 0.6, what is the new amount of household consumption?
$148 billion
$219.4 billion
$220.6 billion
$178 billion
1. Assume in a simple economy that the level of saving is –500 when aggregate output equals zero and that the marginal propensity to save is 0.2. Derive the saving function and the consumption function, and draw a graph showing these functions. At what level of aggregate output does the consumption curve cross the 45° line? Explain your answer and show this on the graph.2. Use your answer to the previous problem to calculate the MPC, MPS, government spending multiplier, and tax multiplier. Draw a graph showing the data for consumption spending, planned aggregate expenditures, and aggregate output. Be sure to identify the equilibrium point on your graph.
Sorry, these two questions are linked. I totally forgot.
Chapter 23 Solutions
Principles of Economics (12th Edition)
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- Draw the consumption function as the relation of the consumer's income and expenditure. What does the slope of the consumption function depend on? Is the consumer's income the only factor determining the level of his consumption spending?arrow_forwardConstruct a consumption function from the data given here and determine the MPC. Given the consumption function in the above question, what is the relationship between disposable income and consumption? Is it direct or indirect and then explain what it means.arrow_forwardComplete the following table. Given Disposable Income and an MPC, calculate the level of consumption and savings.arrow_forward
- Use the graph to answer the following questions: a)what is the value of the MPC? b)what is the value of the MPS?arrow_forwardOn the following graph, use the blue line (circle symbol) to plot this economy's consumption function based on these data. ? CONSUMPTION (Billions of dollars) 700 600 500 400 300 200 100 0 -100 0 100 200 300 400 500 600 DISPOSABLE INCOME (Billions of dollars) 700 800 From the preceding data, you know that the level of savings in the economy last year was $ economy is billion and the marginal propensity to save in this Suppose that this year, disposable income is projected to be $500 billion. Based on your analysis, you would expect consumption to be $ billion and savings to be $ billion.arrow_forwardThe accompanying graph represents the aggregate consumption function for the small island nation of Pineapple Paradise. The people of Pineapple Paradise expect their future disposable income to increase. Use the graph to show an increase in consumption expenditures. What is the new level of aggregate autonomous consumer spending? 1 $1000 2 $3000 3 $2000 4 $4000arrow_forward
- Construct a consumption function from the data given here and determine the MPC. Given the consumption function in the above question, what is the relationship between disposable income and consumption?arrow_forwardRefer to the information provided in Table Below to answer the questions that follow Y C S 0 50 -50 50 60 -10 75 65 10 100 70 30 120 74 46 140 78 62 160 82 78 1- If the Consumption Function is C= 50+0.2Y 2- Find the consumption and the saving for this economy. 3- Illustrate by graph the consumption function.arrow_forwardConsider a hypothetical economy in which the marginal propensity to consume (MPC) is 0.50. That is, if disposable income increases by $1, consumption increases by 50c. Suppose further that last year disposable income in the economy was $400 billion and consumption was $350 billion. On the following graph, use the blue line (arcle symbol) to pict this economy's consumption function based on these data. CONSUMPTION (Bions of dollars) ) 700 600 500 400 300 200 100 0 -100 9 100 200 300 400 500 000 DISPOSABLE INCOME (Billions of dollars) 700 000 From the preceding data, you know that the level of savings in the economy last year was 3 economy is billion and the marginal propensity to save in this Suppose that this year, disposable income is projected to be $600 billion. Based on your analysis, you would expect consumption to be 3 billion and savings to be S billion,arrow_forward
- What does the consumption function showarrow_forwardConsider an economy described by the following equations. Y= C + I + GC= 100 + .75 (Y - T)I= 500 - 50rG= 125T= 100 Where: Y is GDP, C is consumption, I is investment, G is government spending, T is taxes and r is the rate of interest. Answer the questions based on the following equations above. a. What is the value of the multiplier? b. What is the equilibrium equation for Y? Show your solution. c. Suppose the Central Bank policy is to adjust the money supply to maintain the interest rate at 4 percent, so r=4. What is the value of output? Show your solution. d. Assuming that no change in fiscal policy, what is the effect of a reduction in interest rate from 4 percent to 3 percent on equilibrium output. Show your solution. e. In this case, explain the policy that was used by the policymaker to target the aggregate demand.arrow_forwardComplete the following table:a. Show the consumption and saving schedules graphically.b. Find the break-even level of income. Explain how it is possible for households to dissave at very low income levels.c. If the proportion of total income consumed (APC) decreases and the proportion saved (APS) increases as income rises, explain both verbally and graphically how the MPC and MPS can be constant at various levels of income.arrow_forward
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