Question

Aggregate Consumption Function Scenario. The aggregate consumption function is given by the following equation: C = 1,000 + 0.75YD where C stands for consumption and YD stands for disposable income. Suppose disposable income increases by $100, this means aggregate consumption will increase by _________ and autonomous consumption _______________.

Answer 1

The disposable income increases by $100, this means aggregate consumption will increase by $75 and autonomous consumption remains at $1000.

Explanation:

We are given the following in the question:

`C(YD) = 1000 + 0.75YD`

where C is the consumption and YD is the disposable income.

If the disposable income increases by $100, then we can write

`C(YD+100)-C(YD) = 1000 + 0.75(YD + 100) - (1000 + 0.75YD)\\C(YD+100)-C(YD) = 0.75(YD + 100-YD)\\C(YD+100)-C(YD) = 75`

Thus, the aggregate consumption will increase by $75.

Autonomous consumption is the consumption when customer makes no disposable income.

Thus, we put YD = 0

`C(0) = 1000 + 0.75(0)\\C(0) = 1000`

Thus, the autonomous consumption is $1000.

The disposable income increases by $100, this means aggregate consumption will increase by $75 and autonomous consumption remains at $1000.