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Homework answers / question archive / “Keynesian” problems Formulas Consumption = autonomous consumption plus the product of the additional amount of consumption per dollar of income and disposable income Consumption Function: C= a + MPC (Y) Marginal Propensity to Consume: additional amount of consumption per dollar of income Marginal Propensity to Save = the additional amount of savings per dollar of income earned

“Keynesian” problems Formulas Consumption = autonomous consumption plus the product of the additional amount of consumption per dollar of income and disposable income Consumption Function: C= a + MPC (Y) Marginal Propensity to Consume: additional amount of consumption per dollar of income Marginal Propensity to Save = the additional amount of savings per dollar of income earned

Economics

“Keynesian” problems

Formulas

Consumption = autonomous consumption plus the product of the additional amount of consumption per dollar of income and disposable income

  • Consumption Function: C= a + MPC (Y)

Marginal Propensity to Consume: additional amount of consumption per dollar of income

Marginal Propensity to Save = the additional amount of savings per dollar of income earned.

  • 1-MPC

Spending Multiplier:          

  1. If the MPC reads .65, and autonomous consumption is 100 billion with disposable income of 300 billion, what is the value of the consumption function?
  2. If autonomous consumption in the economy is (300) with the MPC at .75 and disposable income of 400 billion, what is the value of the savings function?
  3. What is the value of MPC when MPS is .84?
  4. If disposable income increases from 100 billion to 350 billion with a corresponding increase in consumption from 25 to 30 billion, what is the value of MPC?
  5. If MPC is .65 and the government injects 300 million in spending, how much consumption is created?
  6. Also, what if the govt. cut taxes by the same amount in #5, how much consumption is created? Hint: remember to read over the "Keynesian Mathematics" notes.

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1) MPC = 0.65

Autonomous consumption (a) = 100 billion

Disposable Income (c) = 300 billion

Consumption Function = a + MPC * c = 100 + 0.65 * 300 = 295

2) If autonomous consumption = 300, thus autonomous saving = -300

MPC = 0.75

MPS = 0.25

Saving function = Autonomous saving + MPS * Disposable Income = -300 + 0.25 * 400 = -200

3) MPC = 0.16 when MPS = 0.84 because MPC + MPS = 1

4) Disposable income income rises by 250

Consumption rises by 5

MPC = (Change in consumption / Change in disposable income) = (5 / 250) = 0.02

5) MPC = 0.65

Multiplier = [1 / (1 - MPC)] = [1 / (1 - 0.65)] = 2.86

Rise in consumption by 300 million raise aggregate demand by 300 * 2.86 = 857.14 million

6) Tax multiplier = (MPC / MPS) = (0.65 / 0.35) = 1.86

Tax cut by 300 million will raise consumption by 300 * 1.86 = 557.14 million

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