3. (Consumption and Saving) Supposed that consumption equals $500 billion when disposable income is $0 and that each increase of $100 billion in disposable income causes consumption to increase by $70 billion. Draw the graph of the consumption function using this information. What is the slope of the consumption function?
To draw the graph of the consumption function, we need to plot the points based on the given information. The consumption function relates the level of consumption to disposable income.
1. Start by plotting the initial point, where consumption equals $500 billion (C = $500 billion) when disposable income is $0 (Y = $0).
- Plot the point (0, 500) on the graph.
2. The consumption function states that each increase of $100 billion in disposable income causes consumption to increase by $70 billion. Since the relationship is linear, we can use this information to find more points.
- For every $100 billion increase in disposable income, consumption increases by $70 billion.
- So, for a disposable income of $100 billion, consumption would be $570 billion.
- Plot the point (100, 570).
- For a disposable income of $200 billion, consumption would be $640 billion.
- Plot the point (200, 640).
- Continue this process for other values of disposable income to find more points.
3. Once you have plotted a few points, connect them with a straight line. This line represents the consumption function.
- The line should be upward sloping to reflect the positive relationship between income and consumption.
Now, let's find the slope of the consumption function. The slope represents the change in consumption divided by the change in disposable income.
Using the given information, we know that each increase of $100 billion in disposable income causes consumption to increase by $70 billion.
So, the slope of the consumption function is:
slope = ΔC / ΔY = $70 billion / $100 billion = 0.7
Therefore, the slope of the consumption function is 0.7.