Question

Honey land analysis its aggregate consumer spending and aggregate disposable income and finds the following data. All numbers in the table are dollars.

YD C

$0 $100

100 180

200 260

300 340

500 500

Assume Honey land is a closed economy with no government spending, no taxes, and no transfers, Furthermore, assume the aggregate price level and interest rate are fixed in Honey land. 1. What does autonomous consumer spending equal in this economy?

2. What is the value of the MPC for Honey land?

3. What is the slope of the consumption function?

4. Suppose future expected disposable income increases in Honey land. How will this affect autonomous consumer spending, The MPC, and the consumption function?

Answer 1

1)Autonomous consumer spending is that amount of Consumption which is incurred when the level of Aggregate disposable income is zero.

Hence, when the aggregate disposable income is 0, at that level of Aggregate disposable income, Consumers Spending is $100.

Hence, autonomous consumer spending in the economy =$100

2) MPC= Change in Consumer Spending/Change in Aggregate Disposable Income

MPC= 80/100= 0.8

Value of MPC= 0.8

3) the slope of the consumption function is equal to the value of MPC.

Therefore, the slope of the consumption function is 0.8

4) if the future expected disposable income increases in honeyland, the Autonomous consumer spending will remain same as it is independent of the level of disposable income. Moreover, the MPC will also remain same because it depends on the consumption habits of the economy.

The consumption function will shift up because for any level of current disposable income the consumers will now Consume more because of the increase in the expected future disposable income.