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In a simple economy (assume there are no taxes, thus Y is disposable income), the consumption function is Upper C equals 1000 plus 0
In a simple economy (assume there are no taxes, thus Y is disposable income), the consumption function is Upper C equals 1000 plus 0.9 Upper C = 1000 + 0.9Y.
Thus, autonomous consumption is -------- and the marginal propensity to consume is ---------. A consumer whose income increases by $100 will increase consumption by $ -----------.
Expert Solution
Thus, autonomous consumption is 1000 and the marginal propensity to consume is 0.9. A consumer whose income increases by $100 will increase consumption by $90.
C = 1000 + 0.9Y.
Autonomous consumption = 1000 (consumption that does not depend on the income of the consumer)
Marginal propensity to consume (MPC) = change in Consumption / change in disposable income
From consumption function C = 1000 + 0.9Y, change in Consumption / change in disposable income = 0.9
Hence, MPC = 0.9
Changes in consumption due to increase in income by $100 = 0.9*100 = $90
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