Question

Assume that autonomous consumption is ​$1,664 billion and disposable income is ​$11600 billion. Using the consumption​ function, calculate consumption expenditure if an increase of​ $1,000 in disposable income leads to an increase of ​$700 in consumption expenditure.

Answer 1

To calculate consumption expenditure using the consumption function, the marginal propensity to consume (MPC) is first determined to be 0.7. The consumption function formula is then applied using autonomous consumption of $1,664 billion and disposable income of $11,600 billion, resulting in a total consumption expenditure of $9,784 billion.

Step-by-step explanation:

To calculate the consumption expenditure using the consumption function, we first need to determine the marginal propensity to consume (MPC). The MPC is calculated by dividing the change in consumption expenditure by the change in disposable income. According to the information provided, an increase of $1,000 in disposable income leads to an increase of $700 in consumption, which means the MPC is 0.7 (700 / 1,000).

The consumption function is given by the formula:

Consumption = Autonomous Consumption + (MPC × Disposable Income)

Given that autonomous consumption is $1,664 billion and disposable income is $11,600 billion, we substitute these values into the function:

Consumption = $1,664 billion + (0.7 × $11,600 billion)

Consumption = $1,664 billion + $8,120 billion

Consumption = $9,784 billion

Therefore, the consumption expenditure with a disposable income of $11,600 billion would be $9,784 billion.