Consider the following Data: MPS = .2 Autonomous spending is 100 What is the consumption function?

Solutions

Expert Solution

The consumption function describes the relationship between consumption and disposable income (income after tax). Autonomous consumption is amount people consume even without any income. It might be possible that they pool in from their savings, but this amount is consumed even without any income. Here, autonomous spending or consumption is given as 100.

MPS or marginal propensity to save is the fraction of money you save out of your disposable income. MPC or marginal propensity to consume is the fraction of money you consume out of your disposable income. Thus, we have MPS + MPC = Y, where Y denotes the total income.

Thus, we have MPC = 1 - MPS.

MPS = 0.2

Therefore, MPC = 1 - 0.2 = 0.8

A consumption function is thus given as the sum of the autonomous consumption and MPC*Y. Let C denote total consumption.

Therefore the consumption function as a function of income is given by:

Rahul Sunny answered 1 day ago

Next > < Previous

Related Solutions

Consider a hypothetical economy with autonomous consumption spending equal to 100 billion dollars, a marginal propensity to consume of 0.8

Consider a hypothetical economy with autonomous consumption spending equal to 100 billion dollars, a marginal propensity to consume of 0.8, private investment spending of 160 billion dollars, government spending of 140 billion dollars, a balanced budget, and balanced trade (i.e. exports and imports are equal). Write a short essay comparing the effects (1) on the government budget and (2) on the equilibrium level of income in the economy of (i) a 5 billion dollar increase in government spending and...

1. Explain the concept of autonomous consumption.2. Identify factors that would cause consumption spending to...

1. Explain the concept of autonomous consumption.2. Identify factors that would cause consumption spending to increase. What effect would that have on aggregate demand?

If Autonomous Savings is $0 , what is the specific consumption function if the MPC is...

If Autonomous Savings is $0 , what is the specific consumption function if the MPC is 0.80 and what is the specific consumption function if the MPC is 0.67?

Question 5 Consider a simple Keynesian model without government spending or taxation. Suppose autonomous consumption is...

Question 5 Consider a simple Keynesian model without government spending or taxation. Suppose autonomous consumption is 500 and autonomous investment is 300 and the equilibrium level of output is 2400.Then the marginal propensity to consume is: a. 2/3 b. 3/5 c. Uncertain,not enough information d. 3 Question 6 Suppose real GDP is growing at 4%per year and velocity is stable.According to the quantity theory of money,a central bank that wants to achieve inflation of 2%per year should: a. Shrink the...

Assume that autonomous consumption = 100, and the marginal propensity to consume = 80%. At what...

Assume that autonomous consumption = 100, and the marginal propensity to consume = 80%. At what level of disposable income will savings = 0? 6. If actual investment is higher than planned investment, what is happening to business inventories? Inventories are growing Inventories are shrinking Inventories are holding steady It depends upon where we are in the busienss cycle

1. Suppose that the MPC is equal to 0.8 and autonomous consumption spending is 400. Then...

1. Suppose that the MPC is equal to 0.8 and autonomous consumption spending is 400. Then the consumption function is given by a. C = 400 - 0.8Yd b. C = -400 + 0.2Yd c. C = 320 x Yd d. C = 400 + 0.8Yd e. C = 400 + 0.2Yd 2. Suppose that the MPC is equal to 0.8 and autonomous consumption spending is 400. At what level of income is saving = 0? a. 400 b. 500...

The consumption function is given by c=0.02Y^2+0.6Y+50 a) express the mpc and mps in terms of...

The consumption function is given by c=0.02Y^2+0.6Y+50 a) express the mpc and mps in terms of Y b) calculate MPC and MPS when y=8; interpret the values

The following data for an imaginary economy. MPC = b = 0.8 , autonomous consumption =...

The following data for an imaginary economy. MPC = b = 0.8 , autonomous consumption = $50 M , Investment = $100 M , Government spending = $80 M, Transfer payments = $40 M, Taxes = $12 M Using this data calculate: a. The level of national income b. The level of Saving

In the Keynesian AE model, if the autonomous components of consumption, investment, government spending, and net...

In the Keynesian AE model, if the autonomous components of consumption, investment, government spending, and net export spending total $250 billion, and the MPS is 0.25, what will unplanned changes in inventory be when output is $1.010 trillion? $4 billion –$4 billion –$5 billion $5 billion If real output is currently less than the natural level of real output, which of the following will result from an increase in aggregate demand? It will make the current recessionary gap smaller. It...

2. Write an investment function (equation) that specifies two components: a. Autonomous investment spending b. Induced...

2. Write an investment function (equation) that specifies two components: a. Autonomous investment spending b. Induced investment spending

Subjects