6. Use the following table to answer the questions below. Consumption (in billio

Question

6. Use the following table to answer the questions below. Consumption (in billions) 8700 9255 9750 Disposable (in billions) 10000 10740 11400 Year 2005 2006 2007 a) If fixed taxes ("net transfers") are $1000 (in billions), what was the level b) Draw the consumption function based on your answer to part a, assuming c) Based on the data above, what is the marginal propensity to consume? of National Income in each of the above years? the function is linear. What is the marginal propensity to save? d) What is the autonomous level of consumption (Co)? e) Write out the mathematical formula for the consumption function using the tax value from part a.

Explanation / Answer

1. National income in NNP at factor cost. It does not include net transfer

2005: 10000-1000 = 9000

2006: 10740-1000=9740

2007:11400-1000=10400

2. Consumption = national income + transfer income

or Consumption = autonomous consumption + MPC*disposable income

3. Savings = Disposable income - consumption

In 2005, S = 1300

In 2006 = 1485

In 2007 = 1650

Marginal propensity to consume = consumption/income

2005: 8700/10000 = 0.87

2006: = 0.87

2008: 0.87

and MArginal propensity to save = 1- MPC = 1-0.87 = 0.13

4. autonomous level of consumption = Consumption - MPC*disposable income

= 8700 - 0.87*10000 = 0

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