Sub- Part
A
Based on the data, Graphical representation of consumption function, with consumption spending on vertical axis and disposable income on horizontal axis.
Sub- Part
A
Explanation of Solution
(a) − Following graph shows the consumption function in an economy.
Sub- Part
Introduction: Consumption function represents the functional relationship between total consumption and gross
B
Based on the data, to find:
Slope, if consumption function is a straight line
B
Explanation of Solution
In case of a straight line, slope of the line remains constant or same everywhere along the line. So, if the consumption function is a straight line then its slope will remain same everywhere along it. The difference between two level of income and consumption will be constant. The slope of consumption function can be calculates as follows −
Thus, the slope of given consumption function is 0.5.
Sub- Part
Introduction: Consumption function represents the functional relationship between total consumption and gross national income. Consumer spending depends on three factors: disposable income (Yd), autonomous consumption (a), i.e. when income is zero, and induced income (b), i.e. the percentage of extra income that is spent. The formula for the same is C = a + b*Yd.
C
Based on the data,
Find the Savings at each level of income and the slope when the saving function is a straight line.
C
Explanation of Solution
If the saving function is a straight line then its slope will remain constant. Difference between two level of income and saving will remain constant along the saving function. As saving function is a straight line, change in saving and income would be the same. Thus, the slope of saving function would be:
| Real Disposable Income (in billion $) | Consumption Expenditure (in billion $) | Savings (in billion $) |
| 100 | 150 | -50 |
| 200 | 200 | 0 |
| 300 | 250 | 50 |
| 400 | 300 | 100 |
Introduction: Consumption function represents the functional relationship between total consumption and gross national income. Consumer spending depends on three factors: disposable income (Yd), autonomous consumption (a), i.e. when income is zero, and induced income (b), i.e. the percentage of extra income that is spent. The formula for the same is C = a + b*Yd.
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