Q: Given the consumption function $$C = a + bYD$$, if $$a = 600$$ and $$b = 0.5$$, what is the level of consumption when disposable income ($$YD) is$$ $$2000$$?

$$C = 600 + 0.5 \times 2000 = 600 + 1000 = 1600$$

Q: If the marginal propensity to consume (MPC) is $$0.8$$, and autonomous consumption is $$200$$, what is the change in consumption when disposable income increases from $$1000 to$$ $$1500$$?

$$\Delta C = 0.8 \times (1500 - 1000) = 0.8 \times 500 = 400$$

Q: If autonomous consumption increases by $$100$$ and the marginal propensity to consume (MPC) is $$0.75$$, by how much does equilibrium income ($$Y) $$increase?

$$\Delta Y = \frac{1}{1-0.75} \times 100 = 4 \times 100 = 400$$

Question 1

Given the consumption function $$C = 600 + 0.5YD$$, what is the value of autonomous consumption, and what does it represent in macroeconomic terms?

Accepted Answer

Autonomous consumption is $600; it represents the amount households would consume even if disposable income were zero.

Question 2

Suppose the consumption function is $$C = 200 + 0.8Y$$ and investment $$I = 300. $$What is the equation for aggregate expenditure ($$AE$$)?

Accepted Answer

$$AE = 200 + 0.8Y + 300$$

Question 3

If the marginal propensity to consume (MPC) is $$0.7$$, what is the marginal propensity to save (MPS)?

Accepted Answer

$$MPS = 0.3$$

Question 4

Given the following data from a consumption table: when disposable income increases from $$0 to$$ $$30$$, consumption increases from $$15 to$$ $$36. $$What is the marginal propensity to consume (MPC)?

Accepted Answer

$$MPC = \frac{36-15}{30-0} = \frac{21}{30} = 0.70$$

Question 5

In the aggregate expenditure (AE) model, what happens when $$AE \u003e Y at a $$given level of income?

Accepted Answer

Inventories fall, and firms increase output.

Question 6

If the consumption function is $$C = 200 + 0.8Y$$ and investment is $$I = 300$$, what is the equilibrium level of income ($$Y) $$where $$AE = Y$$?

Accepted Answer

$$Y = 2500$$

Question 7

Why are income ($$Y) $$and disposable income ($$Y_d) $$considered equal in a simple macroeconomic model with no government or taxes?

Accepted Answer

Because there is no government or taxation, so all income is disposable.

Question 8

If the marginal propensity to consume (MPC) is $$0.5$$, what is the value of the multiplier ($$k) in $$the simple Keynesian model?

Accepted Answer

$$k = \frac{1}{1-0.5} = 2$$

Question 9

Suppose the AE curve is below the 45° line at a certain income level. What does this indicate about inventories and future output?

Accepted Answer

Inventories are accumulating, so firms will decrease output.

Question 10

Given the consumption function $$C = a + bYD$$, if $$a = 600$$ and $$b = 0.5$$, what is the level of consumption when disposable income ($$YD) is$$ $$2000$$?

Accepted Answer

$$C = 600 + 0.5 	imes 2000 = 600 + 1000 = 1600$$

Question 11

If the marginal propensity to consume (MPC) is $$0.8$$, and autonomous consumption is $$200$$, what is the change in consumption when disposable income increases from $$1000 to$$ $$1500$$?

Accepted Answer

$$\Delta C = 0.8 	imes (1500 - 1000) = 0.8 	imes 500 = 400$$

Question 12

A country has the following consumption function: $$C = 100 + 0.75Y. If $$investment is $$200$$, what is the equilibrium level of income ($$Y$$)?

Accepted Answer

$$Y = \frac{100 + 200}{1 - 0.75} = \frac{300}{0.25} = 1200$$

Question 13

If the marginal propensity to save (MPS) is $$0.2$$, what is the value of the multiplier ($$k$$)?

Accepted Answer

$$k = \frac{1}{0.2} = 5$$

Question 14

Which of the following best describes the relationship between the 45° line and the AE curve in the Keynesian cross diagram?

Accepted Answer

The 45° line shows all points where $$AE = Y$$, and equilibrium occurs where the AE curve intersects the 45° line.

Question 15

If autonomous consumption increases by $$100$$ and the marginal propensity to consume (MPC) is $$0.75$$, by how much does equilibrium income ($$Y) $$increase?

Accepted Answer

$$\Delta Y = \frac{1}{1-0.75} 	imes 100 = 4 	imes 100 = 400$$

Question 16

In a simple economy with no government or foreign sector, if planned aggregate expenditure ($$AE) is $$less than output ($$Y$$), what is the likely short-run effect?

Accepted Answer

Firms will cut production due to rising inventories.

Question 17

If the consumption function is $$C = 150 + 0.6Y$$ and income is $$1000$$, what is the level of saving ($$S$$)?

Accepted Answer

$$S = Y - C = 1000 - (150 + 0.6 	imes 1000) = 1000 - 750 = 250$$

Question 18

A government introduces a lump-sum tax of $$T in an $$economy with the consumption function $$C = 200 + 0.8(Y - T). If$$ $$T$$ increases by $$50$$, what is the immediate effect on consumption?

Accepted Answer

$$\Delta C = 0.8 	imes (-50) = -40$$

Question 19

If the marginal propensity to consume (MPC) is $$0.6$$ and investment increases by $$200$$, what is the total change in equilibrium income ($$Y$$)?

Accepted Answer

$$\Delta Y = \frac{1}{1-0.6} 	imes 200 = 2.5 	imes 200 = 500$$

Chapter 6: The Simplest Short-Run Macro Model – Consumption, Aggregate Expenditure, and Equilibrium

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