Question

Assume:

Y_d = $ 400 billion

b = .85

a = $ 70 billion

A)What is consumption (C) ?

B)What are savings (S) ?

C)What is APC ?

D)What is APS ?

Assume:

Y_d  = $ 3000 billion

b = .75

a = $ 120 billion

A)What is consumption (C) ?

B)What are savings (S) ?

C)What is APC ?

D)What is APS ?

For the following problem, assume that the MPC,b, takes into account how much consumers spend as total income (Y) in the economy is changes.

So we can rewrite our consumption function as C= a +bY

Furthermore assume:

a= $100 billion

b=.9

GDP= $6,000 billion

A)What is total Y in the economy ?

B)What is consumption in the economy

C)What are savings in the economy ?

D) If consumers were the only ones buying goods in the economy, would the economy be at equilibrium ? Why or why not ?

Answer 1

Consumption function:

C = a + b Yd

Where, a is the autonomous consumption

b is the MPC

Yd is the disposable income.

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(1)

(A) C = a + b Yd

=> C = $70 billion + 0.85 ($400 billion)

=> C = $410 billion

(B) Yd = C+S

=> S = Yd - C

=> S = $400 billion - $410 billion

=> S = -$10 billion

(C) APC = C/Yd

=> APC = ($410 billion / $400 billion)

=> APC = 1.025

(D)APS = S/Yd

=> APS = (-$10 billion / $400 billion)

=> APS = -0.025

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(2)

(A) C = a + b Yd

=> C = $120 billion + 0.75 ($3000 billion)

=> C = $2370 billion

(B) Yd = C+S

=> S = Yd - C

=> S = $3000 billion - $2370 billion

=> S = $630 billion

(C) APC = C/Yd

=> APC = ($2370 billion / $3000 billion)

=> APC = 0.79

(D)APS = S/Yd

=> APS = ($630 billion / $3000 billion)

=> APS = 0.21

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(3)

Note: Yd = Y-T

if T = 0, then Yd = Y

So, C = a + bY

(A) Total Y in the economy is $6000 billion

(B) C = a + bY

=> C = $100 billion + 0.9 ($6000 billion)

=> C = $5500 billion

(C) S = Y - C

=> S = $6000 billion - $5500 billion

=> S = $500 billion

(D) If consumers were the only ones buying goods in the economy, then at equilibrium point Y = C holds.

Set. Y = C

=> Y = a + bY

=> Y = $100 billion + 0.9Y

=> Y - 0.9Y = $100 billion

=> 0.1Y = $100 billion

=> Y = ($100 billion / 0.1)

=> Y = $1000 billion.

The equilibrium Y is $1000 billion.