Question

When income is $10,000, consumption spending is $6,500.

• When income is $11,000, consumption spending is $7,250.
For this economy, an initial increase of $200 in net exports translates into a(n)

Answer 1

The consumption function represents the relationship between income and consumption spending. By calculating the marginal propensity to consume, we can find the equation of the consumption function. The equilibrium is determined by setting consumption equal to income.

The consumption function measures how consumption spending changes in response to changes in income. It shows the relationship between income and consumption.

To find the consumption function, we need to calculate the marginal propensity to consume (MPC) using the given information:

MPC = change in consumption / change in income

MPC = ($7,250 - $6,500) / ($11,000 - $10,000) = $750 / $1,000 = 0.75

The consumption function is C = a + MPC * Y, where C is consumption, a is autonomous consumption, MPC is the marginal propensity to consume, and Y is income.

Using the values given, we can find the equation of the consumption function:

$7,250 = a + 0.75 * $11,000

a = $7,250 - 0.75 * $11,000 = $7,250 - $8,250 = -$1,000

Therefore, the consumption function is C = -$1,000 + 0.75Y.

To determine the equilibrium, we set consumption equal to income:

C = Y

-$1,000 + 0.75Y = Y

0.25Y = $1,000

Y = $1,000 / 0.25 = $4,000

So, the equilibrium income in this economy is $4,000.