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a) An economy's consumption schedule is given in the table below
a) An economy's consumption schedule is given in the table below. GDP=DI 6600 6800 7000 7200 7400 7600 7800 8000 C 6680 6840 7000 7160 7320 7480 7640 7800
i. Explain the following term with example: (5 marks) a. Consumption b. Gross Domestic Product
ii. If disposable income were $7400, how much would be saved? (2 marks)
iii. What is the "break-even" level of disposable income? (2 marks) iv. What is this economy's marginal propensity to consume? (2 marks)
Expert Solution
| GDP = DI | Consumption | Change in GDP | Change in Consumption | MPC |
| 6600 | 6680 | - | - | - |
| 6800 | 6840 | 200 | 160 | 0.8 |
| 7000 | 7000 | 200 | 160 | 0.8 |
| 7200 | 7160 | 200 | 160 | 0.8 |
| 7400 | 7320 | 200 | 160 | 0.8 |
| 7600 | 7480 | 200 | 160 | 0.8 |
| 7800 | 7640 | 200 | 160 | 0.8 |
| 8000 | 7800 | 200 | 160 | 0.8 |
a) Consumption is the amount of money spent by consumers on consuming goods from disposable income available with them.
Gross domestic product is the monetary value of all goods produced in an fiscal year.
b) If disposable income is 7,400, consumption is 7,320
Saving = Income - Consumption = 7,400 - 7,320 = 80
c) Break even level of disposable income occurs when DI = Consumption which occurs when DI is 7,000.
d) MPC = change in consumption / change in DI = 160 / 200 = 0.8
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