Question

1. According to Keynes, what is the most important determinant of (or influence on) the level of Consumer Spending households undertake in a time period?

2. Use the following Consumption function data to answer the questions below: Real Disposable Income Consumption Saving MPC MPS $100 $150 $200 $200 $300 $250 $400 $300 $500 $350 A. What is Saving if Real Disposable Income = $400. What is Saving if Yd = 500? B. What is the marginal propensity to consume (MPC)? C. What is the marginal propensity to save (MPS)? D. What is the break-even income (level of income at which Saving = 0)? E. What is the mathematical relation between the MPC and the MPS?

3. Suppose most business executives expect a slowdown in the economy (slower sales growth for their firm). How might that affect the economy?

Answer 1

1. According to Keynes, the most important determinant of (or influence on) the level of Consumer Spending households undertake in a time period is disposable income. Disposable income is the income left with an individual after paying taxes.

2.

Real Disposable Income	Consumption	Saving	MPC	MPS
100	150	-50
200	200	0	0.5	0.5
300	250	50	0.5	0.5
400	300	100	0.5	0.5
500	350	150	0.5	0.5

Marginal Propensity to consume = Change in consumption/change in income

Marginal Propensity to save = Change in savings/ change in income

Break even income, from the table = $200

MPC+MPS = 1

3. If most business executives expect a slowdown in the economy (slower sales growth for their firm), it will mean a small or even a negative growth in future income. As income is a key determinant of consumption, the pessimistic view about future income would translate in lower consumption and hence lower aggregate demand.