Question

(Consumption and Saving) Suppose that consumption equals $500 billion when disposable income

is $0, and that each increase of $100 billion in disposable income causes consumption to increase
by $70 billion. Draw a graph of the consumption function using this information. What is the
slope of the consumption function?

Answer 1

Let's draw the consumption function graph. On the x-axis, we'll have disposable income in billions of dollars, and on the y-axis, we'll have consumption in billions of dollars.

Based on the given information, when disposable income is $0, consumption is $500 billion. So, we'll plot the point (0, 500) on the graph.

For each increase of $100 billion in disposable income, consumption increases by $70 billion. This means that for every $100 billion increase in disposable income, we can move up by $70 billion on the y-axis.

To find the slope of the consumption function, we can use the formula: change in consumption / change in disposable income. In this case, the slope would be 70/100 = 0.7.

So, the slope of the consumption function is 0.7.