Use the table below to solve this problem Level of Ouput Comsumption Saving APS

Question

Use the table below to solve this problem Level of Ouput Comsumption Saving APS APC MPC And income GDP) D() 240 260 280 300 320 340 360 380 $244 S4 1.0167 10000 0.9857 0.0167 0.0000 0.0143 0.8 0.8 0.8 0.2 0.2 0.2 8 09733 0.0267 0.80.2 0.2 0.2 0.2 0.8 02 276 2929 324 340 356 12 16 0.9625 0.9529 0 9444 0.9368 0.0375 0.0471 0.0556 0.8 0.8 0.8 20.0.0632 24 400372 28 9300 0,0700 0.8 0.2 Suppose the wealth effect is such that $10 changes in wealth produce $1 changes in consumption at each level of income. Assume real estate prices tumble such that wealth declines by $80 EEnter answers as whold numbers.) What will be the new level of consumption at the $340 billion level of disposable income? 1. 2. What will be the new level of saving?

Explanation / Answer

1. If real estate prices tumble such that wealth declines by $80 and the wealth effect is such that a $10 changes in wealth produce a $1 changes in consumption at each level of income, then consumption will fall by $8 at every level of income (0.1 x $80=$8).

This implies consumption equals $316 (i.e., $324-$8) at the income level of $340. Consumption was originally $324 at this income level and the decline in wealth results in a fall in consumption by $8.

Therefore, the new level of consumption at the $340 billion level of disposable income is $316.

2. In order to find the new level of savings after the decline in wealth we subtract the new level of consumption (i.e., $316) from disposable income (i.e., $340), which equals $24 (= $340 - $316). The household increases savings to offset the decline in wealth.

Therefore, the new level of saving will be $24.

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