Question

Please solve this to practice the concept of MPC and MPS and how to calculate consumption, GDP and saving in a closed economy with only households.

1. Answer the question on the basis of the following consumption schedule: C = 20 + .9Y, where C is consumption and Y is disposable income. What is the MPC and What is MPS?

2. Tessa's break-even income is $10,000 and her MPC is 0.75. If her actual disposable income is $16,000 how much does she save?

3. If DI is $275 billion and the APC is 0.8, then how much is the saving in this economy? (Hint: Use APC to estimate C for $275 billion of DI)

4. If S = -200 + .15Y, where S is saving and Y is disposable income. What is the MPC? What is the schedule for C?

Answer 1

1. C= 20 + 0.9Y

MPC = 0.9

MPS = 1-MPC = 1-0.9 = 0.1.

2.At break even income , Tessa consume (10000)(0.25)= $2500 because at break even she consume the savings also.  If actual disposable income is 16000 , then C= 0.75(16000)=$12000. So, her level of consumption expenditure is $(12000+2500)= $14500. Savings = Actual income- consumption= $(16000-14500)= $1500.

3. DI = $275 billion

APC = C/DI = 0.8

So, C = DI (APC) = (275)(0.8)= $220 billion.

Saving = DI- C = $(275-220) billion

= $ 55 billion

4. S= -200 + 0.15 Y

MPS = 0.15Y

MPC = 1-MPS = 1-0.15 = 0.85

C = 200 + 0.85Y