Macroeconomics (Book Only)
12th Edition
ISBN: 9781285738314
Author: Roger A. Arnold
Publisher: Cengage Learning
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Chapter 10, Problem 15QP
To determine
The impact of increased savings and decreased interest rate on the economy.
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The consumption and saving functions in the Keynesian model
Suppose we observe that a person's disposable income (DI) is 50,000 in 2019 and 63,000 in 2020. Suppose we
observe that this person's consumption (C) is 47,000 in 2019 and 58,700 in 2020. Assume that this person's
consumption obeys the Keynesian consumption function, so that C = A + MPC*DI. Finally, assume that A and MPC are
unchanged between 2019 and 2020.
(a) Calculate the values of A and MPC for this consumer, and graph the consumption function. (Hint: subtract the C
function in 2019 from the C function of 2020).
(b) In general, saving is given by the formula S = DI - C. Calculate this person's saving in 2019 and 2020. Assuming that
this person's wealth (net worth) on January 1, 2019 was 80,000, what is their wealth on January 1, 2020? on January 1,
2021?
(c) In general, if consumption is given by the function C = A + MPC*DI, then saving will obey the saving function S = -A
+ (1 - MPC)*DI. Plot the saving function…
What happens in the simple Keynesian model if households expect lower income in the future and decide to save more today?
Adjust the graph and answer the question.
Assume that investment varies directly with aggregate income.
Aggregate expenditure (in billions of dollars)
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9
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2
1
0
0
1 2
3
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Aggregate income (in billions of dollars)
8
9
AE = AI
C+1
10
In the country of Borealis, the minimum amount of consumption spending that will occur is $300
- that is, no matter what level of income households have, the aggregate amount of consumption
spending in the economy will be at least $300. In addition, for every extra dollar of national
income, consumption spending will increase by $0.75.
Chapter 10 Solutions
Macroeconomics (Book Only)
Ch. 10.1 - Prob. 1STCh. 10.1 - Prob. 2STCh. 10.1 - Prob. 3STCh. 10.2 - Prob. 1STCh. 10.2 - Prob. 2STCh. 10.2 - Prob. 3STCh. 10.3 - Prob. 1STCh. 10.3 - Prob. 2STCh. 10.3 - Prob. 3STCh. 10.4 - Prob. 1ST
Ch. 10.4 - Prob. 2STCh. 10 - Prob. 1VQPCh. 10 - Prob. 2VQPCh. 10 - Prob. 3VQPCh. 10 - Prob. 4VQPCh. 10 - Prob. 5VQPCh. 10 - Prob. 1QPCh. 10 - Prob. 2QPCh. 10 - Prob. 3QPCh. 10 - Prob. 4QPCh. 10 - Prob. 5QPCh. 10 - Prob. 6QPCh. 10 - Prob. 7QPCh. 10 - Prob. 8QPCh. 10 - Prob. 9QPCh. 10 - Prob. 10QPCh. 10 - Prob. 11QPCh. 10 - Prob. 12QPCh. 10 - Prob. 13QPCh. 10 - Prob. 14QPCh. 10 - Prob. 15QPCh. 10 - Prob. 16QPCh. 10 - Prob. 17QPCh. 10 - Prob. 18QPCh. 10 - Prob. 19QPCh. 10 - Prob. 20QPCh. 10 - Explain how to derive a total expenditures (TE)...Ch. 10 - Prob. 22QPCh. 10 - Prob. 23QPCh. 10 - Prob. 24QPCh. 10 - Prob. 25QPCh. 10 - Prob. 1WNGCh. 10 - Prob. 2WNGCh. 10 - Prob. 3WNGCh. 10 - Prob. 4WNGCh. 10 - Prob. 5WNGCh. 10 - Prob. 6WNGCh. 10 - Prob. 7WNGCh. 10 - Prob. 8WNG
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- It is possible that the interest rate might affect consumption spending. An increase in the interest rate could, in principle, lead to increases in saving and therefore a reduction in consumption, given the level of income. Suppose that consumption is, in fact, reduced by an increase in the interest rate. How will the IS curve be affected?arrow_forwardExplain the relationship between consumption and saving in the Keynesian model.arrow_forwardIn the simple Keynesian model, if aggregate expenditure is less than GDP, output will a)decline as firms increase their prices to stop the buildup of inventories b)increase as firms increase production to try to stop depletion of inventories c)remain unchanged indefinitely unless government takes action d)increase as firms cut their prices to try to stop depletion of inventories e)decline as firms cut production to stop the buildup of inventoriesarrow_forward
- 7. Deriving and exploring the total expenditures curve The following graph shows total production (TP) and the level of Natural Real GDP (NRGDP) for a hypothetical economy. When Real GDP is $325 billion, consumption is $275 billion, government purchases are $50 billion, and investment is $25 billion. When Real GDP is $375 billion, consumption is $300 billion, government purchases are $50 billion, and investment is $25 billion. Use the blue line (circle symbol) to plot the economy's total expenditure function within a simplified Keynesian framework. 450 425 X 400 375 TOTAL EXPENDITURE (Billions of dollars) 500 475 350 325 300 300 TP NRGDP 325 350 375 400 425 REAL GDP (Billions of dollars) 450 475 500 TE ?arrow_forwardUS Real GDP fell by 9 percent during the 2nd quarter of 2020. Real investment spending fell by 16.9 percent during Q2 of 2020, and investment spending makes up about 20 percent of GDP. How much did the decline in investment spending contribute to the decline in real GDP in the US during Q2 of 2020?arrow_forwardWhat are the various factors which influence propensity to consumearrow_forward
- The following are exogenous (not directly affected by income): G = 11 I = 4 X = M = 0 The consumption function is: C = k + cY, where k = 3, c = 0.8 What is the equilibrium level of GDP? What is the multiplier?arrow_forwardAccording to Keynes, wealth or credit is a factor that affects consumption. An example of wealth is A,B,C,OR D one answer a an increase in expected future income. b a decline in interest rates. c an increase in economic output. d an increase in the value of stockarrow_forwardHow would an increase in the interest rate affect consumption and investment function?arrow_forward
- 10 . In the “complete Keynesian model”, the investment functions was I = I0 - f(i). An analyst now proposes the following investment function: I = I0 - f(i) + qY, where “q” is a parameter and Y is national income = GDP. Provide two different arguments, i.e. explanations as to why this investment function makes sense. The focus is on the new term, qY (q times Y), in the function.arrow_forwardCalculate investment expenditure from the following data about an economy which in equilibrium: National income =$1000 Marginal propensity to save=$0.25 Autonomous consumption expenditure=$200arrow_forwardIf the marginal propensity to consume is 0.90, what is the marginal propensity to save?arrow_forward
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