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.
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.
a) To find the marginal propensity to consume (MPC), you need to determine the change in consumption (C) divided by the change in income (Y). In this case, the consumption function is C = 5 + 0.75 * (Y - T). The coefficient 0.75 represents the marginal propensity to consume.
b) To find consumers' savings when disposable income is 100, you first need to calculate consumption (C) using the given consumption function. C = 5 + 0.75 * (Y - T). Since Y is the national income and T is the government taxes, in this case, C = 5 + 0.75 * (100 - T).
To calculate savings, you subtract consumption (C) from disposable income (Y - T). Savings (S) = (100 - T) - (5 + 0.75 * (100 - T)).
c) A "consumption shock" refers to a sudden and significant change in consumption patterns. Given the structure of this consumption function, a consumption shock could occur by changing the coefficient of Y or T, or by introducing an additional variable influencing consumption. For example, if the coefficient of Y is increased or decreased, it would change the sensitivity of consumption to changes in income. Similarly, if the coefficient of T is altered, it would affect how government taxes impact consumption.
d) If each individual consumer had the same consumption function, a government transfer program like social security would have an impact on aggregate consumption. A transfer program involves providing individuals with additional income, which would increase their disposable income (Y - T) and therefore increase their consumption (C). As a result, aggregate consumption would increase as well.
e) False. If the government were to cut taxes T by 15 units and Y were to stay the same, aggregate demand would not increase by exactly 11.25. The increase in aggregate demand would depend on the marginal propensity to consume (MPC) in this case. The change in aggregate demand would be equal to the change in consumption, which can be calculated using the following formula: ΔC = MPC * ΔY. The value of ΔY is zero in this scenario, so the change in aggregate demand (ΔC) would also be zero.