Chapter 26, Problem 4P

To determine

To determine: The aggregate consumption function and the marginal propensity to consume and save in Eastlandia.

Concept Introduction:

Gross Domestic Product (GDP): It is defined as the value of output which is produced inside the border of a country in the given interval of time.

The formula to calculate change in GDP is:

Here,

• is autonomous spending
• MPC is marginal propensity to consume.

Marginal Propensity to Consume (MPC): It is defined as the change which occurs in total consumption level due to change in income.

The formula to calculate MPC is:

Here,

• is change in income.
• is change in consumption level.
• MPC is marginal propensity to consume.

Marginal Propensity to Save (MPS): It is defined as the variation in the saving when the income of an individual varies.

The formula to calculate MPS is:

Here,

• MPC is marginal propensity to consume.
• MPS is marginal propensity to save.

Consumption Level (C): It is one of the largest components of GDP .The individual consumption depends on the disposable income.

Consumption Function: It shows how the change in disposable income of an individual changes the consumption level.

The formula to calculate consumption function is:

Here,

• C is consumption level.
• is autonomous consumption.
• is disposable income
• MPC is marginal propensity to consume.

Autonomous Consumption: This is defined as the consumption level when the income of an individual is zero.