Posted by **Bo** on Friday, July 11, 2008 at 12:32pm.

consumption function, C=5+0.75*(Y-T). Y is,national income and T is government taxes.

a What is the marginal propensity to consume?

b If disposable income is 100, what are consumers' savings?

c What form might a "consumption shock" take given the structure of this

consumption function?

d If each individual consumer had the same consumption function, would a

government transfer program, such as a social security, affect aggregate

consumption?

e (T/F) If the government were to cut taxes T by 15 units and Y were to

stay the same, aggregate demand would increase by 11.25.

- Economics -
**economyst**, Friday, July 11, 2008 at 2:42pm
a) If Y goes up by a dollar, how much would C go up by? MPC is: (change-C)/(change-Y)

b) disposable income is Y-T, which can either be consumed or saved. Calculate C when Y-T=100

c) what if taxes suddenly changed?

d)if we taxed everybody by $100 to fund the transfer program and everybody got $100 transfer, would consumption change?

e) hummmm tough question. if taxes were cut, would government spending also be reduced? If Government spending stays the same, then the government must borrow dollars or must print money or must somehow have a pile of cash. So if G stays the same without out borrowing, the T, else F.

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