Question

1. Suppose the consumption function in the U.S. is represented by the following equation (where B represents billions)

C = 200B + 0.8Y_D

a) What is the value of the MPC? ___________

b) What is the level of autonomous consumption? ____________

c) What is the level of consumer spending when income is equal to $1200B?

d) What is the level of consumer spending if income increases by $400B?

Answer 1

Marginal propensity to consume is 0.8. it is the slope of the consumption function and it measures the change in consumption whenever there is a change in income

Autonomous consumption is 200 and it represents the fixed and independent part of consumption which does not depend on disposable income

When income is 1200 there is no tax or transfer which means disposable income is also 1200. The consumption will therefore be 200+0.8*1200 = 1160B

Consumer spending increases by 320 when the disposable income is increased by 400. This is because the marginal propensity to consume is 0.8 which means increasing consumption is 0.80*400 = 320B. Assuming that previously the income was 1200 , new consumption will be 1160 + 300 = 1460B.