Pls answer all questions for Upvote 1. Marginal Propensity to Consume Laughlandi
ID: 2443898 • Letter: P
Question
Pls answer all questions for Upvote
1. Marginal Propensity to Consume
Laughlandia’s consumption schedule is given in the table below (in millions of dollars).
GDP=DI
C
1660
1668
1680
1684
1700
1700
1720
1716
1740
1732
1760
1748
1780
1764
1800
1780
Use the information to answer the following:
a. If GDP which equals disposable income is $1680 how much is saved?
b. What is the "break-even" level of disposable income?
c. What is this economy's marginal propensity to consume?
d. What is the average propensity to consume when disposable income is $1700? When disposable income is $1800?
e. What is the simple spending multiplier in this scenario
2. Explain what the simple spending multiplier is and the relevance of the marginal propensity to consume. Give examples.
3. Draw a consumption function. What is the relationship between the consumption function and Aggregate Demand?
GDP=DI
C
1660
1668
1680
1684
1700
1700
1720
1716
1740
1732
1760
1748
1780
1764
1800
1780
Explanation / Answer
1
a)
Saving = 1680 – 1684
= - 4
b)
Break even disposable income reaches where disposable income is equal to consumption.
Thus, breakeven disposable income here is:$ 1700
c)
Marginal Propensity to Consume (MPC) = Change in Consumption / Change in DI
= 16 /20
= 0.8
d)
Average propensity to Consume (APC) When income is 1700: 1700/1700 = 1
APC when income is 1800 : 1780/1800
= 0.98