f the MPC reads .65, and autonomous consumption is 100 billion with disposable i
ID: 1162590 • Letter: F
Question
f the MPC reads .65, and autonomous consumption is 100 billion with disposable income of 300 billion, what is the value of the consumption function? If autonomous consumption in the economy is (300) with the MPC at .75 and disposable income of 400 billion, what is the value of the savings function? What is the value of MPC when MPS is .84? If disposable income increases from 100 billion to 350 billion with a corresponding increase in consumption from 25 to 30 billion, what is the value of MPC? If MPC is .65 and the government injects 300 million in spending, how much consumption is created? Also, what if the govt. cut taxes by the same amount in #5, how much consumption is created? Hint: remember to read over the "Keynesian Mathematics" notes.
Explanation / Answer
Consumption function :
C = a + MPC (Yd)
Where C = consumption
a = autonomous consumption
Yd = disposable income
Saving function :
S = -a + (1-mpc)Yd
Where S = savings
1- MPC = MPs
1) Given, a = 100 billion ,
MPC = 0.65
Yd = 300 billion.
Put values in consumption function, we get
C = 100 + 0.65*(300)
C = 395 billion.
2) a = 300
MPC =0.75
Yd = 400billion
Put values in the saving function, we get
S = -300 + (1-0.75)*400
S = -200 billion
It means non savings is 200 billion.
3) Value of MPC when MPS = 0.84
MPC = 1 - MPS
MPC = 1 - 0.84
MPC = 0.16
4) If Yd changes from 100 to 350 billion.
It means change in Yd = 350 - 100 = 250 billion.
Corresponding change in consumption is increase from 25 to 30 billion.
It means change in consumption = 30 - 25 billion = 5 billion.
Mpc = change in consumption / change in disposable income (Yd)
MPC = 5 / 250 = 0.02
5) MPC = 0.65
And government injects 300 million = 0.3 billion in spending.
It means that income increases by 0.3 billion.
And MPC = 0.65, it means the consumption created or increases in consumption is. ( Put values in formula of MPC)
0.65 = increase in consumption / 0.3
Increase in consumption = 0.65 * 0.3 = 0.195 billion.
So $0.195 billion consumption is created.
6) tax cut also have same effect it means income rises by again 0.3 billion so consumption created is same as in part 5) i.e., 0.195 billion.
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