Answer to Question #50391 in Macroeconomics for abdulla sabit

Question #50391
What is consumption function?Suppose the consumption function of a society is as follows: C=100+0.85Y, where C=Total consumption expenditure and Y=Disposable income. Answer the following questions: a.What is the autonomous consumption? b.What is the total consumption when disposable income is 5000? c.What is induced consumption when disposable income is 8000? d.Find MPS .Prove that MPC+MPS=1
Consumption function is a single mathematical function used to express
consumer spending and could be written as follows:
C = A + MPC * D
where
C = Consumer spending
A = Autonomous consumption, or the level of consumption that would
still exist even if income was \$0
MPC = Marginal propensity to consume, which is the ratio of
consumption changes to income changes
D = Real disposable income
a. So, autonomous consumption = A = 100
b. C=100+0.85Y = 100+0.85 * 5000 = 4350
c. Induced consumption is household consumption that varies with
income = MPC * D = 0.85 * 8000 = 6800
d. MPC+MPS=1
MPS = 1 &ndash; MPC = 1 &ndash; 0.85 = 0.15
We can prove it:
If Yd = C + S, then any change in Yd must resolve a change in C and
some part a change in S.
So we can write:
&Delta;Yd = &Delta;C + &Delta;S
If we divide both sides by &Delta;Yd, and we get:
1 = MPC + MPS

Need a fast expert's response?

Submit order

and get a quick answer at the best price

for any assignment or question with DETAILED EXPLANATIONS!