Question

Consider the following components of the aggregate expenditure equilibrlum modek:

C=0.75(r−150)+150
Planned =250
G=225
NX=100
​ Assume all model parameters are in bltions of dollarm.
a. What is the marginal propensity to consume in this economy?

Answer 1

In the provided consumption function, the marginal propensity to consume (MPC) in this economy is 0.75, indicating that with every extra dollar of disposable income, consumption increases by 75 cents.

Step-by-step explanation:

The marginal propensity to consume (MPC) is the increase in consumer spending due to an increase in income. In the consumption function provided, C = 0.75(r−150) + 150, the MPC is the coefficient of disposable income, r.

The consumption equation can be re-written as C = 0.75r - 0.75(150) + 150, which simplifies to C = 0.75r + 37.5. Here, 0.75 represents the MPC, which means if disposable income increases by one dollar, consumption will increase by 75 cents.

The marginal propensity to consume (MPC) in this economy can be determined by looking at the consumption function. In this case, the consumption function is given as C = 0.75(r - 150) + 150, where r represents disposable income. The MPC is the coefficient of the disposable income in the consumption function, which is 0.75.