Question

. Disposable income in the country of Islandia grew from 2010 to 2017 as shown in the table below. If the country’s marginal propensity to consume is 0.8, and in 2010 the level of consumption spending was $250 million, answer the following questions. (millions of dollars) 2010 $200 2011 $210 2012 $240 2013 $260 2014 $290 2015 $310 2016 $340 2017 $370 a) Calculate the level of consumption spending for each year. b) What is the aggregate autonomous consumption spending for Islandia? What does this mean? c) What is the country’s aggregate consumption function?

THE NUMBERS ARE IN THE FORM OF A TABLE.. 200,210,240 ETC.. ARE IN THE DISPOSABLE INCOME COLUMN AND ITS MATCHING YEAR IS ITS YEAR COULMN

Answer 1

(a) Consumption function C = a + bY where a: Autonomous spending, b: MPC, Y: Disposable income

In 2010, Y = $200, C = $250 and b = 0.8, therefore

250 = a + 0.8 x 200

250 = a + 160

a = $90

Therefore, Consumption function: C ($) = 90 + 0.8Y

Year	Y ($)	C ($) = 90 + 0.8Y
2010	200	250
2011	210	258
2012	240	282
2013	260	298
2014	290	322
2015	310	338
2016	340	362
2017	370	386

(b) Aggregate autonomous consumption spending = $90. Ths means that even if disposable income is zero, the consumer will spend $90 for consumption expenditure and this is the subsistence level of consumption.

(c) Aggregate consumption function: C ($) = 90 + 0.8Y