According to the basic consumption function, consumption rises at a fixed rate w

Question

According to the basic consumption function, consumption rises at a fixed rate when both disposable income and real GDP increase.

Tasks:

Please answer all questions completely and easy to understand! Thank you!

a. What is the marginal propensity to consume?

b. ?What is the present level of planned investment spending for the present period?

c. What is the equilibrium level of real GDP for the present period?

d. What is the equilibrium level of saving for the present period?

e. ? If planned investment spending for the present period increases by $25 billion, what will be the resulting change in equilibrium real GDP? What will be the new equilibrium level of real GDP if other things, including price level, remain unchanged?

According to the basic consumption function, consumption rises at a fixed rate when both disposable income and real GDP increase. Tasks: Consider the diagram below, which applies to a nation with no government spending, taxes, and net exports. Use the information in the diagram to answer the questions, and explain your answers. Please answer all questions completely and easy to understand! Thank you! a. What is the marginal propensity to consume? b. ?What is the present level of planned investment spending for the present period? c. What is the equilibrium level of real GDP for the present period? d. What is the equilibrium level of saving for the present period? e. ? If planned investment spending for the present period increases by $25 billion, what will be the resulting change in equilibrium real GDP? What will be the new equilibrium level of real GDP if other things, including price level, remain unchanged?

Explanation / Answer

a). The given consumptin function is

C=0.5+0.75Y

since, Marginal propensity to consume =dC/dY

hence, MPC=0.75

b). As seen from the graph the present level of planned investment spending=$0.5 trillion

c). From equation

Y=C+S

S=-(0.5)+0.25Y

since for equilibrium S=I

-0.5+0.25Y=0.5

hence, Y=$4trilllion.

equilibrium GDP=$4 trillions.

d). Equilibrium level of saving=-0.5+0.25*4=$0.5 trillion

e). New planned investment=(0.5+0.025)=$0.525 triilion

Y=1.025*4=$4.1trillions

hence Change in eq. GDP=$(4.1-4)=$0.1 trillion

hence new equilibrium real GDP=$4.1trillions.

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