Question

If the consumption function is C= $400 billion + 0.8Y

a) what is the MPC?
b) how large is autonomous C? 400 billion
c) how much do consumers spend with incomes of $4 trillion?
d) how much do they save?

Answer 1

C = 400 billion + 0.8Y

a) MPC = 0.8
b) autonomous C = 400 billion
c) C = 400 billion + 0.8y = 400 billiob + (0.8 * 4 trillion) = 3.6 trillion
d) S = -400 billion + 0.2(4 trillion) = - 400 billion + 800 billion = 400 billion

Answer 2

we know that

The Consumption Function is the relationship between amount consumed and disposable income. A consumption function tells us how much people plan to consume at various levels of disposable income.

in this problem

`C=`$
`400billion+0.8Y`

Part a) what is the MPC?

The Marginal Propensity to Consume (MPC) is the ratio of the change in consumption to the change in disposable income

therefore

the MPC is the slope of the Consumption Function line

the answer Part a) is

`0.8`

Part b) How large is autonomous C?

we know that

Autonomous Consumption is the part of consumption that is independent of or does not depend on the level of disposable income

So

Is the value of C for Y=0

therefore

the answer Part b) is

$
`400billion`

Part c) how much do consumers spend with incomes of $4 trillion?

`C= 400billion+0.8Y`

for
`Y=4trillion`

`C= 400billion+0.8*4trillion`

`C= 400billion+3.2trillion`

`C= 3.6trillion`

therefore

the answer Part c) is

`C= 3.6trillion`

Part d) how much do they save?

`S = -400 billion + 0.2*(4 trillion)\\ S=-400billion+800billion\\ S=400billion`

therefore

the answer Part d) is

`400billion`