Scenario: Aggregate Consumption Equation Suppose that the aggregate consumption function is given by the equation: C = 200 + 0.8 YD, where C represents consumption and YD represents disposable income. Reference: Ref 25-9 (Scenario: Aggregate Consumption Equation) According to the scenario Aggregate Consumption Equation, if disposable income is $500, aggregate consumption is:

A. $0.

B. $200.

C. $400.

D. $600.

The correct answer and the letter d. $600.

Explanation:

A consumption equation relates aggregate consumption with disposable income (income minus taxes). In this way, it shows how the increase in aggregate disposable income, that is, of the whole economy, impacts aggregate consumption. In this case, we have the consumption function given by: C = 200 + 0.8YD, and the disposable income is $ 500. Like this,

C = 200 + 0.8YD

C = 200 + 0.8 (500)

C = 600.

That is, by including the disposable income of $ 500 in the consumption equation, we will have an aggregate consumption of $ 600.