Question

Here are 3 different Keynesian economies. Each is a simple 2-sector model - just households and business firms.

For each economy, identify:
        A. The marginal propensity to consume
        B. The level of autonomous consumption
        C. The level of income at which the economy is in equilibrium.



ECONOMY #1:

    When disposable income = 600, consumption = 600, planned investment = 600
    When DI = 1200, C = 1100, Ip = 600
    When DI = 1800, C = 1600, Ip = 600
    When DI = 2400, C = 2100, Ip = 600


        MPC =    

        Autonomous consumption =    

        Equilibrium level of income =    




ECONOMY #2:

    When disposable income = 1200, consumption = 1100, planned investment = 900
    When DI = 2200, C = 1900, Ip = 900
    When DI = 3200, C = 2700, Ip = 900
    When DI = 4200, C = 3500, Ip = 900
    When DI = 5200, C = 4300, Ip = 900


        MPC =    

        Autonomous consumption =    

        Equilibrium level of income =    




ECONOMY #3:

    When disposable income = 200, saving = -50, planned investment = 200
    When DI = 400, S = 0, Ip = 200
    When DI = 600, S = 50, Ip = 200
    When DI = 800, S = 100, Ip = 200


        MPC =    

        Autonomous consumption =    

        Equilibrium level of income =    

Answer 1

1) MPC = Change in C / Change in DI = 500 / 600 = 0.83

When DI rises by 600, consumption rise by 500. Thus, at a DI level of 0, consumption must be 100 which is the level of autonomous consumption.

Consumption function = Autonomous consumption + MPC * Y = 100 + 0.83Y

Investment = 600

Equilibrium occurs when Y = C + I

Y = 100 + 0.83Y + 600

Y = 4,200

2) MPC = Change in C / Change in DI = 800 / 1,000 = 0.8

When DI rises by 1,000, consumption rise by 800. Thus, at a DI level of 0, consumption must be 140 which is the level of autonomous consumption.

Consumption function = Autonomous consumption + MPC * Y = 140 + 0.8Y

Investment = 900

Equilibrium occurs when Y = C + I

Y = 140 + 0.8Y + 900

Y = 5,200

3)

MPS = Change in S / Change in DI = 50 / 200 = 0.25

MPC + MPS = 1

Thus, MPC = 0.75

When DI rises by 200, saving rise by 50. Thus, at a DI level of 0, saving must be -100 and consumption must be 100 which is the level of autonomous consumption.

Consumption function = Autonomous consumption + MPC * Y = 100 + 0.75Y

Investment = 200

Equilibrium occurs when Y = C + I

Y = 100 + 0.75Y + 200

Y = 1,200