Question

6.  The Simple Keynesian Model  (i.e., the income-expenditure model)

Assume:   C = 150 + 0.9DI

                   I = 50

                   DI = C + I in equilibrium for a 2-sector model

                   (Note:  DI = C in a 1-sector model)

a.  Define the term, consumption.

b.  What is the value of “autonomous” consumption (also called “a” or the vertical intercept)?

c.  What is the value of the slope (also referred to as “b”) of the consumption function?  

d.  There’s another name for the slope of the consumption function.  What is it?

Answer 1

Question 6

(a)

Consumption refers to the purchase of final goods and services by all the households with in the eoconomy. This purchase of final goods and services include both domestically produced as well as imported goods and services.

Thus, consumption is the aggregate expenditure on final goods and services by all households in an economy.

(b)

The consumption function is written as follows -

C = a + bDI

Where,

C = consumption

a = Autonomous consumption

b = marginal propensity to consume

DI = Disposable income

The given consumption function is as follows -

C = 150 + 0.9DI

Thus,

The value of "autonomous" consumption (also called "a" or the vertical intercept) is 150.

(c)

The given consumption function is as follows -

C = 150 + 0.9DI

Thus,

The value of the slope (also referred to as "b") of the consumption function is 0.9.

(d)

The another name for the slope of the consumption function is marginal propensity to consume.