Question

1. Given the information below, complete the chart and answer the questions that follow. Assume there are no taxes, so Y = Yd. Also, assume that I, G and (X-M) are autonomous expenditures. In this problem, the MPS = .20

S	Y	C	I	G	(X-M)	TE
	0	1,500	1,250	1,350	-100
	5,000
	10,000
	15,000
	20,000
	25,000

what is the MPC?

At an income level of 10,000, what is the INDUCED level of consumption?

At an income level of 25,000, what is the AUTONOMOUS level of consumption?

What is the value of equilibrium income?

Using the Keynesian framework (TE/TP), plot savings and consumption (vertical axis) against income (Q or Y) on the horizontal axis

Answer 1

(a) MPS = 1 - MPC = 1 - 0.2 = 0.8

(b) Consumption function: C = a + bY

When Y = 0, C = a = 1,500

C = 1,500 + 0.8Y

When Y = 10,000,

Induced Consumption = 0.8 x 10,000 = 8,000

(c) When Y = 25,000, Autonomous consumption = 1,500 (which does not change with Y)

(d) In equilibrium, Y = TE = C + I + G + X - M

S = Y - C

S	Y	C	I	G	X - M	TE
-1,500	0	1,500	1,250	1,350	-100	4,000
-500	5,000	5,500	1,250	1,350	-100	8,000
500	10,000	9,500	1,250	1,350	-100	12,000
1,500	15,000	13,500	1,250	1,350	-100	16,000
2,500	20,000	17,500	1,250	1,350	-100	20,000
3,500	25,000	21,500	1,250	1,350	-100	24,000

So, equilibrium Y = 20,000

NOTE: As per Chegg Answering Policy, 1st 4 parts are answered.