Question

ROUND ALL CALCULATIONS TO TWO (2) DECIMAL PLACES a. (15 pts) Please draw the Keynesian Cross assuming the following information. Be sure to specify at what point consumption and disposable income are equal. Marginal Propensity to Consume = .88 Autonomous Consumption = $525 b. (5 pts) Assume that your disposable income is $760. How much are you consuming? Are you saving or dissaving? c. (10 pts) Assume that autonomous consumption increases to $890. Please illustrate this change on graph from part a. Again, you must specify at what point consumption and disposable income are equal. d. (5 pts) Based on the change in part c, illustrate what will happen to aggregate demand.

Answer 1

In this question I firstly make consumption function, which include autonomous consumption and consumption from disposable income. Aggregate demand is the function of consumption by household, expenditure on investment by enterprenuer and government expenditure. As other this are not given in question so assumed to be zero.

Then for equilibrium put AD equals to Y(output). As AD is equal to total consumption so at equilibrium consumption is equal to disposable income.

In part(b) there were given disposable income so he only consume .88 part of the disposable income remaining part he saves.