(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
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.
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.
(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
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.
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.
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Chapter 27A Solutions
Principles of Economics (Second Edition)
- Using the table below to answer the following questions. Assume all values represent trillions of dollars. Construct a graph of the Aggregate planned expenditure What is the equilibrium expenditure? Explain what happens at a real GDP of $4 trillion dollars. (Note the aggregate expenditures and the effects on inventories) What are your total autonomous expenditures? What is the marginal propensity to consume? Ignoring imports and income taxes, what is the multiplier? If investment increases by $1.5 trillion, what is the change in real GDP?arrow_forwardConsider the non-linear aggregate consumption function: C = 0.05Y²+ Y + 80 (Where, C = aggregate consumption and Y = aggregate income). a) Find the marginal propensity to consume (MPC) and the average propensity to consume (APC). b) What is the relationship between MPC and APC in this case? c)What happens to the MPC as Y becomes larger and larger? Is it likely that an aggregate consumption function would have this functional form? d) Find the elasticity of the consumption function and show that it equals the MPC/APC. e) Illustrate your solutions to (b) and (c) graphically, showing the consumption function, the MPC and APC.arrow_forwardSuppose the marginal propensity to consume (MPC) is either 0.75, 0.96, or 0.62. a. For each value of the MPC, calculate the impact of a one-dollar decrease in taxes on GDP. Instructions: Enter your responses rounded to one decimal place. MPC Impact of a one-dollar decrease in taxes 0.75 0.96 0.62 b. For each value of the MPC, calculate the impact on GDP of a $250 million decrease in taxes. Instructions: Enter your responses rounded to one decimal place. MPC Impact on GDP 0.75 $ 0.96 $ 0.62 $ Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.arrow_forward
- a) Draw a graph of a consumption function (with disposable income on the x-axis and consumption on the y-axis). b) On the graph from Part a, show how we can “see” the Marginal Propensity to Consume (MPC) and provide a brief explanation.arrow_forwardWhy will a temporary tax increase be insignificant in reducing consumption expenditures by the amount expected a) Because people viewed the tax increase as permanent. b) Because people chose to increase their saving. c) Because people viewed the tax increase as temporary. d) consumption expenditures are not related to the level of taxation.arrow_forwardA company is growing rapidly, and is investing nearly all of its income, so its marginal propensity to consume (MPC) is 0.85. Remembering that MPC + MPS equals 1, we find out that the MPS is 0.15. What is the spending multiplier in this case?arrow_forward
- The 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_forwardWhat is the eventual effect on real GDP if the government increases its purchases of goods and services by $75,000? Assume the marginal propensity to consume (MPC) is 0.75. $ What is the eventual effect on real GDP if the government, instead of changing its spending, increases transfers by $75,000? Assume the MPC has not changed. $ An increase in government transfers or taxes, as opposed to an increase in government purchases of goods and services, will result in an identical eventual effect on real GDP. no change to real GDP. a larger eventual effect on real GDP. a smaller eventual effect on real GDP.arrow_forwardIf the consumption function is C= $800 billion + 0.8 Y, Instructions: In part a, round your response to one decimal place. In parts b-d, enter your responses as a whole number. If you are entering any negative numbers be sure to include a negative sign (-) in front of those numbers. a. what is the MPC? b. how large is autonomous consumption? billion c. how much do consumers spend with incomes of $4 trillion? billion d. how much do they save? billion 100%arrow_forward
- a) Given the following values of consumption, investment, and government purchases (all in (in millions of $) at three point of Real GDP, calculate (in millions of $) and plot the Total Expenditures curve. Real GDP Consumption Investment Government Purchases Total Expenditure Q1 600 50 200 Q2 750 80 400 Q3 1000 100 600 b) On the same diagram, draw the TP curve. Explain the reason behind the shape and position of the TP curve. c) Given, optimal inventory is $500 million worth of goods, TE = $2000 million worth of goods and TP = $2300 million worth of goods, how will the economy adjust to achieve equilibrium? d) Assume the economy is in recessionary gap. On the same diagram you in part a), show this case. If the government intervenes using…arrow_forwardThe following table shows income and consumption. Calculate: A- Saving (S), B- Marginal propensity to consume (MPC), C- Marginal propensity to save (MPS), D- Average propensity to consume (APC), E- Average propensity to save (APS). (show your calculations, write the answers to 2 decimal places) Y C S MPC MPS APC APS S = MPC = MPS = APC = APS = 300 360 410 400 600 510 800 250 1050 0.32arrow_forwardIn 2009, the US Federal government cut taxes by approximately $300 billion, increased government spending by approximately $300 billion, and increased transfer payments by approximately $200 billion. Answer the following questions, assuming the marginal propensity to consume was 0.75. What was the maximum change in GDP from the government spending? Show your work.arrow_forward
