Chapter 27A, Problem 1QFR

To determine

(a)

To explain:

The reason for equality between slope of the consumption function with MPC.

Answer to Problem 1QFR

MPC is the ratio of an overall increase in pay spent by a customer on the produced goods andservices,as compared to saving it. It matches with the consumption function'slope.

Explanation of Solution

MPC is a key concept of Keynesian macroeconomic theory.It is enumerated through the division ofthe change arisen in consumption level by the change arisen in income level. When the changesin income are plotted on the X axis and changes in consumption are plotted on the Y axis, then the MPC can be depicted which is sloped line of the original consumption function.

MPC is also called consumption function that means the consumption function's slope is always equal to MPC. This is because consumption function slopes positively when MPC value is positive. The MPC value is lower than unity as the increasing rate of consumption is very low than the increasing rate of income. When consumption function becomes a straight one, MPC value remains constant at every income level.So,it can be finished that the slope between any two points on consumption function delivers the MPC value.

Economics Concept Introduction

Consumption function:

Consumption function is the mathematical expression of the functional connection between complete level of consumption and an economy's gross national income.This function's slope matches MPC.

To determine

(b)

To explain:

The equality between slope of the aggregate expenditure (AE) function with MPC.

Answer to Problem 1QFR

Along with some other aggregate marginal expenditure, MPC primarily makes the base of the AE curve's slope. AE grows at the same speed with that of MPC in initial level.

Explanation of Solution

The MPC as the slope of the consumption function line tends to form the basis of the aggregate expenditures line's slope. This slope is built up with the MPI,marginal propensity for government purchases(MPG) andmarginal propensity to import(MPM)also. The aggregate line possesses positive slope reflecting induced expenditures. These expenditures are aggregate expenditures dependent on income or production level. If the aggregate economy can generate huge income, then all the four macroeconomic sectors will be induced to incur more expenditure and vice versa. Since, MPC is the ratio of changed consumption with changed income so it determines the slope of the AE. Hence,it can be saidthat AE slope is equal to MPC.

Economics Concept Introduction

Aggregate expenditure:

Aggregate expenditure (AE) is summation of all the final produced outputs' present value within the economy over a specified term. These include the expenditures made on consumer goods, planned investment, government expenditure and exports import gap. Slope of this line always matches MPC.