From 2009 to 2014, Eastlandia experienced large fluctuations in both aggregate consumer spending and disposable income, but wealth, the interest rate, and expected future disposable income did not change. The accompanying table shows the level of aggregate consumer spending and disposable income in millions of dollars for each of these years. Use this information to answer the following questions. Year Disposable income millions of dollars Consumer spending millions of dollars2009 $100 $1802010 350 3802011 300 3402012 400 4202013 375 4002014 500 500b. What is the marginal propensity to consume? What is the marginal propensity to save? c. What is the aggregate consumption function?

Question

Business

Ralph Vargas

3 November, 07:24

From 2009 to 2014, Eastlandia experienced large fluctuations in both aggregate consumer spending and disposable income, but wealth, the interest rate, and expected future disposable income did not change. The accompanying table shows the level of aggregate consumer spending and disposable income in millions of dollars for each of these years. Use this information to answer the following questions. Year Disposable income millions of dollars Consumer spending millions of dollars2009 $100 $1802010 350 3802011 300 3402012 400 4202013 375 4002014 500 500b. What is the marginal propensity to consume? What is the marginal propensity to save? c. What is the aggregate consumption function?

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Answers (2)

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Rex Mann · Answer 1

Marginal propensity to consume (MPC) = Change in consumer spending / Change in disposable income.

= (380 - 180) / (350 - 100)

= 200 / 250

= 0.80

Marginal propensity to save (MPS) = 1 - Marginal propensity to consume (MPC) = 1 - 0.80 = 0.20

Autonomous consumption (A) = Consumption spending (C) - Marginal propensity to consume * Disposable income.

= 180 Million - 0.80 * 100 Million

= 180 Million - 80 Million

= $ 100 Million.

Aggregate consumption function = 100 Million + 0.8 * YD

YD - disposable income

Nina Duffy · Answer 2

MPC = 0.8

MPS = 0.2

Aggregate consumption function:

C = 100 + (0.8 * YD)

Explanation:

From the table above:

Marginal Propensity to Consume (MPC) which is the ratio of change in consumption of an economy to change in the disposable income during the same period.

Choosing any two years from the table and calculating the ratio of the difference in consumer spending and disposable income.

MPC = change in consumption spending : change in disposable income

A.) MPC = $ (340 - 380) : $ (300 - 350)

MPC = - $40 : - $50 = 0.8

B.) Marginal Propensity to save (MPS)

Using the relation:

MPS + MPC = 1

MPC = 0.8

MPS + 0.8 = 1

MPS = 1 - 0.8 = 0.2

C.) Aggregate consumption function : C = A + (MPC * YD)

C = Consumption,

A = Autonomous consumption

YD = Disposable income

To get A:

A = C - (MPC * YD)

C = 340, YD = 300

A = 340 - (0.8 * 300)

A = 340 - 240 = $100million

Substituting A = 100 into the aggregate consumption function

C = 100 + (0.8 * YD)