Question

Honey land analysis its aggregate consumer spending and aggregate disposable income and finds the following data. All numbers in the table are dollars. YD C $0 $100 100 180 200 260 300 340 500 500 Assume Honey land is a closed economy with no government spending, no taxes, and no transfers, Furthermore, assume the aggregate price level and interest rate are fixed in Honey land.

a. What does autonomous consumer spending equal in this economy?

b. What is the value of the MPC for Honey land?

c. What is the slope of the consumption function?

d. Suppose future expected disposable income increases in Honey land. How will this affect autonomous consumer spending, The MPC, and the consumption function?

Answer 1

a. Autonomous consumer spending is the consumer spending when disposable income is Zero. Thus Autonomous consumer spending = $100.

b. Marginal propensity to consume is the proportion of increase in disposable income that is consumed. Thus MPC = (260-180)/(200-100) = 0.8

C. The consumption function C = C₀ + c (Y_d) where C₀ is autonomous consumer spending, c is MPC and Y_d is disposable income. Thus slope of consumption function = 0.8

d. When future expected disposable income increases, the autonomous consumer spending increases, MPC increases and the consumption function shifts up and becomes steeper.