Economics: Principles and Policy (MindTap Course List)
13th Edition
ISBN: 9781305280595
Author: William J. Baumol, Alan S. Blinder
Publisher: Cengage Learning
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Chapter 26.A, Problem 1TY
To determine
Calculate
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Consider the non-linear aggregate consumption function:
C = 0.05Y²+ Y + 80
(Where, C = aggregate consumption and Y = aggregate income).
21
d) Find the elasticity of the consumption function and show that it equals the
MPC/APC.
Find the equilibrium level of GDP (income or V) demanded in an economy in which investment (1) is always $300, net exports (X-IM) are always - 550, government expenditures (G) and taxes (T) are each equal to $400, and the consumption function is described by the following algebraic equation:
C = 150 + 0.75Dl
DI is disposable income.
How much saving (5) is there at the equilibrium level of income.
Hint:
(1) Dl = Y (national income or GDP) minus taxes (Y-T)
(2) Income (Y) not consumed (C) must be saved (S). This means that S = Y-C.
(3) to answer this you have to set Y=AE or Y=C+1+G (X-IM), and solve for Y. Then you have to solve for S.
Suppose that the consumer’s consumption demand function is given by Cd = 0.8(Y−T)+10. Investment is Id = 20, government expenditure is G = 10, and tax is T = 10.
What is the equilibrium GDP (income)?
Suppose that government expenditure increases by 10 units while tax is unchanged. How will GDP change? What is the multiplier?
Suppose that government expenditure increases by 10 units while tax also increases by 10 units. How will GDP change? What is the multiplier?
Chapter 26 Solutions
Economics: Principles and Policy (MindTap Course List)
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- Determine the change in the equilibrium level of consumption (find ΔC) following a decrease in government spending from 400 to 300 (ΔG = -$100). A: positive 400$ B: negative 300 c: negative 400 D: positive 300arrow_forwardConsider the hypothetical country of Kejimkujik. Suppose that national income in Kejimkujik is $300 billion, households pay $100 billion in taxes, household consumption is equal to $160 billion, and the marginal propensity to consume (MPC) is 0.6. On the following graph, use the blue line (circle symbol) to plot the economy's consumption function. Consumption Function050100150200250300350400450500500450400350300250200150100500CONSUMPTION (Billions of dollars)DISPOSABLE INCOME (Billions of dollars) Suppose now that Kejimkujik’s national income increases to $330 billion. Assuming the amount paid in taxes is fixed at $100 billion and that MPC = 0.6, what is the new amount of household consumption? $148 billion $219.4 billion $220.6 billion $178 billionarrow_forwardSuppose you estimate the consumption functionarrow_forward
- Suppose the consumption of an economy is given by C = 20 +0.6Y The following investment function is given : 1 = 10+ 02Y What will be the equilibrium level of national income?arrow_forwardConsider an economy that is characterized by the following equations: C= 400 + 0.5 Yd I = 700 - 4000i + 0.1y G= 200 T= 200 (M/P)d - = 0.75Y - 7500€ (MP)== 600 What is the equilibrium consumption (C)?arrow_forwardThe consumption function is given by: C = 200+0.75 (Y-T). The investment function is I = 200-25r. Government purchases and taxes are both 100. For this economy , graph the IS curve for r ranging from 0 to 8.arrow_forward
- Suppose that planned investment and planned government purchases do not depend on income: | = 15 and G = 17. Consumption, as you would expect, does depend on income via the consumption function C = 2 + 0.75Y – 0.75T. Net taxes are T = 12. Your friend thinks that the equilibrium will be where Y = 150 but he is wrong. What is the best description of this situation? the (Y, AE) point is above the 45 degree line, Y will adjust down the (Y, AE) point is above the 45 degree line, Y will adjust up the (Y, AE) point is below the 45 degree line, Y will adjust down the (Y, AE) point is below the 45 degree line, Y will adjust uparrow_forwardSuppose that autonomous consumption (a) is 200, private investment spending (I) is 340, government spending (G) is 300, Net taxes (T) are 300 and marginal propensity to consume (b) is 80 %, and marginal tax rate (t) is 25 %. By using the above information: a) Find the equilibrium value of national income (you can take the approximate value if necessary b) Find out the effects of an increase in government expenditure by100 c) Just find the new national income equilibrium level when the marginal tax rate is increased to 30 % and the marginal propensity to consume is increasing to 0.9. (you can give the numerical value approximately )arrow_forwardfunction is given by: C = 200 + 0.75(Y - T). Planned investment (I) is 100, government purchases (G) and taxes (T) are both 100. (a) Graph planned expenditure as a function of income;.arrow_forward
- (a) Find equilibrium income when investment demand is 400 and C = 0.8Y. (b) Would output be higher or lower if the consumption function were C = 100 + 0.7Y?arrow_forwardThe following table shows consumption (C), investment spending (I), and government purchases (G), for some hypothetical economy at several levels of income (reported in billions of dollars of real GDP). Assume that in this economy, income is taxed at a rate of 25%, base consumption is $25 billion, and that the marginal propensity to consume (MPC) is 0.333, or 1/3. Further assume that this economy is closed, that is, there is no international trade and so net exports are always equal to zero. Use the given information to fill in disposable income, consumption, and planned expenditures in the following table. Income: Real GDP Disposable (After Tax) Income C Ip G Planned Expenditures (Billions of dollars) (Billions of dollars) (Billions of dollars) (Billions of dollars) (Billions of dollars) (Billions of dollars) 0 0 25 150 50 100 150 50 200 150 50 300 150 50 400 150 50 500 150 50…arrow_forwardThe following table shows consumption (C), investment spending (I), and government purchases (G), for some hypothetical economy at several levels of income (reported in billions of dollars of real GDP). Assume that in this economy, income is taxed at a rate of 25%, base consumption is $50 billion, and that the marginal propensity to consume (MPC) is 0.667, or 2/3. Further assume that this economy is closed, that is, there is no international trade and so net exports are always equal to zero. Use the given information to fill in disposable income, consumption, and planned expenditures in the following table. Income: Real GDP Disposable (After Tax) Income C Ip G Planned Expenditures (Billions of dollars) (Billions of dollars) (Billions of dollars) (Billions of dollars) (Billions of dollars) (Billions of dollars) 0 0 50 100 50 100 100 50 200 100 50 300 100 50 400 100 50 500 100 50…arrow_forward
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