In a simple economy (assume there are no taxes; thus, Y is disposable income), t
ID: 1091101 • Letter: I
Question
In a simple economy (assume there are no taxes; thus, Y is disposable income), the consumption function is: C = 500 + 0.75Y. The current level of real GDP is $6000. At this level of real GDP, consumption will be s ,and savings will be s . If GDP were to increase by $1000, consumption would increase by S . (Roundyour responses to the nearest dollar.) At a real GDP level of $6000, the average propensity to consume is , and the average propensity to save is . (Roundyour answers to two decimal places.)Explanation / Answer
at Y = $6000
Consumption, C = 500+.75*6000 = $5000
Saving, S = 6000-5000 = $1000
if New GDP = $6000+$1000 =$7000
New Consumption, C = 500+.75*7000 = $5750
Increase in consumption = $750
average propensity to consume @6000 = C/Y = 5000/6000 = 5/6 = .8333 = 83.33%
average Propensity to save = S/Y = 1000/6000 = 1/6 = .1666 = 16.67%