In a simple economy (assume there are no taxes; thus, Y is disposable income), t
ID: 1090904 • Letter: I
Question
In a simple economy (assume there are no taxes; thus, Y is disposable income), the consumption function is:
C = 200 + 0.80Y.
The current level of real GDP is $5000
At this level of real GDP, consumption will be $___, and savings will be $___. If GDP were to increase by $1000, consumption would increase by $___. (round your responses to the nearest dollar.)
At a real GDP levelof $6000 the average propensity to consume is ___, and the average propensity to save is ___. (round your answers to two decimal places.)
Explanation / Answer
consumption will be (from formula) 200+.8*5000 = $4200
saving will be = GDP-Consumption = 5000-4200 = $800
if GDP is increase by $1000
New consumption = 200+.8*(5000+1000) = $5000
consumption will increase by = consumptionnew - Consumptionold = 5000-4200 = $800
Avg propensity to consume = total consumption/GDP = 5000/6000 = .83
avg propensity ot save = total saving/GDP = 1000/6000 = .17