Assume a consumption function that takes on the following algebraic form: C = $100 + .8Y. Assume that Y = $1000 what is the level of consumption at this income level.
C = $100 + .8($1000) = $100 + $800 = $900.
1. Using the above figure calculate the marginal propensity to consume between the aggregate income levels of $80 and $100. Also explain why this consumption function is linear.
The marginal propensity to consume is equal to $15/$20 = .75. The consumption function is linear because the marginal propensity to consume is constant and therefore the slope is the same throughout all income levels.
2. Assume consumption is represented by the following: C = 400 + .75Y. Also assume that planned
…show more content…
Therefore, if people have more money then they are likely to purchase more goods - potentially ones from our country, thus exports will rise and the value of net exports will increase. If disposable income abroad is low then exports will fall and the value of net exports will fall.
• Disposable income at home. This refers to how much money people at home have available to spend on luxuries. The more money people have at home, the likelier they are to spend - which can result in a rise in imports. Rising imports will have a negative effect on net exports on the overall aggregate demand. Vice versa.
• Exchange rates. These play a large part in the value of net exports. A fall in a countries exchange rate will reduce the price of exports and raise the price of imports, thus exports should rise and imports fall - resulting in an increase in net exports. A rise in a countries exchange rate will raise the price of exports and make imports cheaper, therefore making exports fall and imports rise. The overall effect will be a fall in net exports.
8. Explain the accelerator theory.
The accelerator effect is when an increase in national income results in a proportionately larger rise in investment
Consider an industry where demand is rising at a strong pace. states that if there is a small change in the production output of consumer change, there will be a much greater change in the production
The exchange rate is the price of one currency in terms of another. A fall in the value of the pound is known as a depreciation and affects both the level of aggregate demand and the costs of production for firms in the UK economy. //One way in which a fall in the exchange rate can be beneficial for the UK economy is that it “should help UK exporters whose goods will be cheaper overseas”. An UK exports are priced in Sterling, and when Sterling can be purchased more cheaply, this makes our goods more affordable. An increased demand for UK exports is an injection into the UK economy and would serve to boost aggregate demand, enabling UK firms to make use of any spare capacity in order to increase output. This would also lead to a higher
Question 31 In Bovania, cattle compose 48% of the consumer price index (CPI), housing composes 32%, and entertainment accounts for the remaining 20%. If, in a certain year, the price of cattle rises by 30% and the price of housing rises by 25%, then:
2. Refer to the above table to answer this question. Suppose that Mia has a budget of $7 and the price of a litre of soya milk is $1, what is the maximum quantity that Mia might purchase?
The Complete Idiot's Guide to Economics © 2003 by Tom Gorma Retrieved on February 27, 2012 http://www.infoplease.com/cig/economics/effect-imports-exports-gdp.html
Unit contribution = Unit Price – Unit Variable Cost = $1.80 – $1.40 = $0.40
Income elasticity measures the responsiveness of consumers to changes in their incomes (McConnell, p 88). Demand for normal goods tends to increase as consumers’ incomes increase and conversely, demand for inferior goods tends to decrease as consumers’ income increases.
Foreign demand for a primary product may also limit economic growth as demand for a particular commodity will cause an increase in demand for a country’s currency, thus resulting in the appreciation of the currency. This would reduce the competitiveness of the country’s manufactured exports, thus leading to a decrease in the financial resources gained from exports which could have enabled the country to raise the level of economic welfare to encourage development.
The GDP accounts for the amount of net exports. Net exports equal the sum of exports less imports. Exports are the purchases of goods and services produced in the U.S. made by foreigners. These add to the GDP. Imports represent domestic purchases of foreign-produced goods and services. So, they must be deducted from the calculation of GDP. In the U.S., net exports are a drag on total GDP because the country regularly imports more than it exports, that is, net exports are in deficit.
2. Develop estimated regression equations, first using annual income as the independent variable and then using household size as the independent variable. Which variable is the better predictor of the annual credit card charges? Discuss your findings.
economy. A higher multiplier suggests, that more of the initial injection of money into the
Thus, the relative price of that foreign good has risen and therefore, less of it will be purchased by domestic residents. So, an increase in e will cause a decrease in imports: a higher e raises the relative cost of foreign goods and therefore reduces V. Conversely, a decrease in e lowers the relative price of foreign goods and therefore increases V. Thus, imports are determined by domestic income levels and the exchange rate. An increase in Y or a decrease in e causes V to increase. A decrease in Y or an increase in e causes V to decrease.
An improvement in domestic economic growth, however, worsens the CAD. As national income increases, so does consumption; import receipts increase and the BOG decreases.
The theory of Marginal Propensity to Consume or (MPC) is based on if and when the consumer will spend that extra money. Conversely, the Marginal Propensity to Save (MPS) is based on the money that the same consumer is willing to save vs. put back into the economy. There are foreign language formulas that can depict various types of Multipliers, (GDP, TAX, Govt Spending) but for this document we will not touch on the related formulas. But trust me Ed, they are there.
appreciation in the exchange rate and a corresponding decline in net exports; monetary easing does the opposite. The impact of changes in interest rates on net exports reinforces the impact on domestic investment In a full-employment closed economy (always holding other things
Suppose South Australian consumers’ average incomes increase from $3,000 to $3,400 per month, which then results in an increase in the quantity of smartphones demanded from 15,000 to18,500. You are required to do the following: