# Answer to Question #50392 in Macroeconomics for abdulla sabit

Question #50392
a.Explain Keynesian theory of consumption with its important features. b.Suppose,the saving of an economy is given by S=-10+0.2Y and autonomous investment I=\$500million. Find: 1.the equilibrium level of income; 2.the level of consumption; 3.the new levels of income and consumption if investment increases permanently by \$500 million.
A. Keynesian theory of consumption is called the theory of absolute income. It is based on the following assumptions:
1. The level of consumption depends only on the magnitude of current disposable income: C = C (Yd), and this relationship is positive, i.e., with an increase in disposable income consumption increases, but
2. In the economy a psychological law acts according to which &quot;people tend to increase their consumption with income growth, but to a lesser extent than income increases.&quot; This is due to the fact that because disposable income is divided into consumption and savings:
Yd = C + S,
3. then the growth of disposable income both consumption and savings increase.
B. The main formula is: Y = C + I. Knowing the formula of consumption, it is possible to derive a formula on savings: S = Y- C.
Thus, S = I. The equilibrium level of income is: -10+0.2Y = 500 000. Y = \$2.5 billion
The level of consumption is: C = 2500 - 500 = \$2 billion.
The new level of income due to investment increase is: Y = \$5 billion.
The new level of consumption due to investment increase is: C = \$4 billion.

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