Economics
Assume a consumption function that takes on the following algebraic form: C = $100 + .8Y. Assume that Y = $1000 what is the level of consumption at this income level.
C = $100 + .8($1000) = $100 + $800 = $900.
1. Using the above figure calculate the marginal propensity to consume between the aggregate income levels of $80 and $100. Also explain why this consumption function is linear.
The marginal propensity to consume is equal to $15/$20 = .75. The consumption function is linear because the marginal propensity to consume is constant and therefore the slope is the same throughout all income levels.
2. Assume consumption is represented by the following: C = 400 + .75Y. Also assume that planned investment (I) equals 100.
(a) Given the information, calculate the equilibrium level of income.
Y= C+I C= 400 + .75Y I= 100
By substituting (2) and (3) into (1) we get:
Y= 400+.75+100
There is only one value of Y for which this statement is true. We can find it by rearranging terms:
Y-.75Y=400+100 Y-.75Y=500 .25Y=500 Y=500 .25 Y=2000
(b) Given the information, calculate the level of consumption and saving that occurs at the equilibrium level of income.
To get value of consumption at equilibrium, simply plug in Y = 2000 in the consumption function to get:
C= 400+.75(2000) C= 400+ 1500 C= 1900
S= Y- C S= 2000-1900
S= 100
C = 1900 and S = 100
(c) Suppose planned investment increases by 100. Calculate the new equilibrium level of income. Given your answer, what is the size of the multiplier for this economy?
Y-.75Y=400+200
C = $100 + .8($1000) = $100 + $800 = $900.
1. Using the above figure calculate the marginal propensity to consume between the aggregate income levels of $80 and $100. Also explain why this consumption function is linear.
The marginal propensity to consume is equal to $15/$20 = .75. The consumption function is linear because the marginal propensity to consume is constant and therefore the slope is the same throughout all income levels.
2. Assume consumption is represented by the following: C = 400 + .75Y. Also assume that planned investment (I) equals 100.
(a) Given the information, calculate the equilibrium level of income.
Y= C+I C= 400 + .75Y I= 100
By substituting (2) and (3) into (1) we get:
Y= 400+.75+100
There is only one value of Y for which this statement is true. We can find it by rearranging terms:
Y-.75Y=400+100 Y-.75Y=500 .25Y=500 Y=500 .25 Y=2000
(b) Given the information, calculate the level of consumption and saving that occurs at the equilibrium level of income.
To get value of consumption at equilibrium, simply plug in Y = 2000 in the consumption function to get:
C= 400+.75(2000) C= 400+ 1500 C= 1900
S= Y- C S= 2000-1900
S= 100
C = 1900 and S = 100
(c) Suppose planned investment increases by 100. Calculate the new equilibrium level of income. Given your answer, what is the size of the multiplier for this economy?
Y-.75Y=400+200