Question

In a closed economy without a govt. sector C= Consumption, S - Savings; Y= National Income: b= marginal propensity to consume. If the consumption function is C=60+ b(Y) and the multiplier value is 5 , it may be inferred that

A) S=60+0.8(Y)
B) S=60+0.2(Y)
C) C=60+0.8(Y)
D) C=$60+0.2(Y)

Answer 1

The correct savings function in the scenario described is S = 0.2Y - 60, based on the given consumption function and multiplier. However, none of the provided options correctly state the savings function due to a sign discrepancy.

Step-by-step explanation:

The student's question revolves around the consumption function and savings in a closed economy without a government sector, with a specified multiplier value. Given that the consumption function is C = 60 + b(Y) and the multiplier is 5, the marginal propensity to consume (MPC) can be derived using the formula 1/Multiplier = 1 - MPC, which yields MPC = 0.8. Since savings (S) equal income (Y) minus consumption (C), and the marginal propensity to save (MPS) is the complement of MPC (1 - 0.8 = 0.2), the savings function can be determined.

Given the MPC is 0.8, the savings function will be S = Y - C, which is

S = Y - (60 + 0.8Y).

Simplifying, we can write it as

S = 0.2Y - 60.

This implies the correct option is the one which states S = 60 + 0.2(Y), however, since there is a '-' sign in the equation S = 0.2Y - 60, none of the given options (A, B, C, D) correctly states the savings function.