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Q1. Suppose a Household has a consumption function equal to C=$20,000 + Yd where C is...

Q1. Suppose a Household has a consumption function equal to C=$20,000 + Yd where C is consumption expenditure and Yd is disposable income, i.e. Income minus Taxes. In 2016, this household had disposable income =$60,000. Calculate this household's level of Consumption and Savings.

Q2. Based on your answers to a., what is the household’s savings rate, i.e. Savings divided by Disposable Income.

Q.3 In 2017, the primary income earner who works on commission had a down year so the household income fell to only $45,000. Using the same Consumption function, calculate the household’s level of Consumption, Savings, and Savings rate.

Q.4 What was the household’s marginal propensity to consume in 2016?

Q.5 What was the household’s marginal propensity to consume in 2017?

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Homework Answers

Answer #1

1. C=$20,000 + Yd

In 2016, disposable income =$60,000.

level of Consumption = 20000 + 60000 = $80,000

and Savings = Yd - C = -$20,000

2. savings rate = Savings /Disposable Income = -20000/60000 = -1/3

3. In 2017, the primary income earner who works on commission had a down year so the household income fell to only $45,000.

new level of Consumption = $65,000

Savings = -$20000

Savings rate = -20/45 = -4/9

4 What was the household’s marginal propensity to consume in 2016 = delta c / delta Y

= -15000 / -15000 = 1

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