Economics: Principles & Policy
14th Edition
ISBN: 9781337696326
Author: William J. Baumol; Alan S. Blinder; John L. Solow
Publisher: Cengage Learning
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Chapter 25.A, Problem 1TY
To determine
Calculate
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Consider the non-linear aggregate consumption function:
C = 0.05Y²+ Y + 80
(Where, C = aggregate consumption and Y = aggregate income).
21
d) Find the elasticity of the consumption function and show that it equals the
MPC/APC.
Your consumption C is related to your disposable income by the equation, C = 200 + 3/5 Yd. Assume that tax = 0
a) What will be the amount of consumption at an income level of 200?
b) What is the value of MPC? MPS?
c) If I = 100, what is the equilibrium level of income?
Find the equilibrium level of GDP (income or V) demanded in an economy in which investment (1) is always $300, net exports (X-IM) are always - 550, government expenditures (G) and taxes (T) are each equal to $400, and the consumption function is described by the following algebraic equation:
C = 150 + 0.75Dl
DI is disposable income.
How much saving (5) is there at the equilibrium level of income.
Hint:
(1) Dl = Y (national income or GDP) minus taxes (Y-T)
(2) Income (Y) not consumed (C) must be saved (S). This means that S = Y-C.
(3) to answer this you have to set Y=AE or Y=C+1+G (X-IM), and solve for Y. Then you have to solve for S.
Chapter 25 Solutions
Economics: Principles & Policy
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- Suppose that the consumer’s consumption demand function is given by Cd = 0.8(Y−T)+10. Investment is Id = 20, government expenditure is G = 10, and tax is T = 10. What is the equilibrium GDP (income)? Suppose that government expenditure increases by 10 units while tax is unchanged. How will GDP change? What is the multiplier? Suppose that government expenditure increases by 10 units while tax also increases by 10 units. How will GDP change? What is the multiplier?arrow_forwardConsider 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 billionarrow_forwardDetermine the change in the equilibrium level of consumption (find ΔC) following a decrease in government spending from 400 to 300 (ΔG = -$100). A: positive 400$ B: negative 300 c: negative 400 D: positive 300arrow_forward
- Suppose the consumption of an economy is given by C = 20 +0.6Y The following investment function is given : 1 = 10+ 02Y What will be the equilibrium level of national income?arrow_forwardThe consumption function for a closed economy with no government sector is given by the equation: C = £200 million + 0.8 Y where C is aggregate consumption and Y is national income. (i) Calculate the value of aggregate savings if the level of national income is £4000 million. (ii) Calculate the equilibrium level of national income if the level of planned investment is £600 million. (ii) Calculate the level of aggregate consumption at the equilibrium level of national income if the level of planned investment is £1000 million. Calculate the change in national income if planned investment rose from £600 (iv) million to £800 million.arrow_forwardConsider an economy that is characterized by the following equations: C= 400 + 0.5 Yd I = 700 - 4000i + 0.1y G= 200 T= 200 (M/P)d - = 0.75Y - 7500€ (MP)== 600 What is the equilibrium consumption (C)?arrow_forward
- Consider the non-linear aggregate consumption function: C = 0.05Y²+ Y + 80 (Where, C = aggregate consumption and Y = aggregate income). b) What is the relationship between MPC and APC in this case? c)What happens to the MPC as Y becomes larger and larger? Is it likely that an aggregate consumption function would have this functional form? e) Illustrate your solutions to (b) and (c) graphically, showing the consumption function, the MPC and APC.arrow_forwardSuppose that planned investment and planned government purchases do not depend on income: | = 15 and G = 17. Consumption, as you would expect, does depend on income via the consumption function C = 2 + 0.75Y – 0.75T. Net taxes are T = 12. Your friend thinks that the equilibrium will be where Y = 150 but he is wrong. What is the best description of this situation? the (Y, AE) point is above the 45 degree line, Y will adjust down the (Y, AE) point is above the 45 degree line, Y will adjust up the (Y, AE) point is below the 45 degree line, Y will adjust down the (Y, AE) point is below the 45 degree line, Y will adjust uparrow_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?arrow_forward
- The consumption function is given by: C = 200+0.75 (Y-T). The investment function is I = 200-25r. Government purchases and taxes are both 100. For this economy , graph the IS curve for r ranging from 0 to 8.arrow_forwardSuppose that autonomous consumption (a) is 200, private investment spending (I) is 340, government spending (G) is 300, Net taxes (T) are 300 and marginal propensity to consume (b) is 80 %, and marginal tax rate (t) is 25 %. By using the above information: a) Find the equilibrium value of national income (you can take the approximate value if necessary b) Find out the effects of an increase in government expenditure by100 c) Just find the new national income equilibrium level when the marginal tax rate is increased to 30 % and the marginal propensity to consume is increasing to 0.9. (you can give the numerical value approximately )arrow_forwardSuppose that autonomous consumption (a) is 200, private investment spending (I) is 340, government spending (G) is 300 , Net taxes (T) are 300 and marginal propensity to consume (b) is 80 %, and marginal tax rate (t) is 25 % . By using the above information: a) Find the equilibrium value of national income (you can take the approximate value if necessary b) Find out the effects of an increase in government expenditure by100 c) Just find the new national income equilibrium level when marginal tax rate is increased to 30 % and marginal propensity to consume is increase to 0.9. (you can give the numerical value approximatelyarrow_forward
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