Question

The following table shows the relationship between income and consumption in an economy.

Income (Y) ($ billion)	Consumption (C) ($ billion)
0	5
10	11
20	17
30	23
40	29
50	35
60	41
70	47
80	53
90	59
100	65

            Assume Investment (I) is $5 billion, government purchases (G) are $4 billion, and net exports (X) are $2 billion. Assume net taxes (T) equal zero.

a.         What is the numerical value of the marginal propensity to consume?

b.         What is the level of income at the point of spending balance?

c.         For the level of income, calculate national saving. Is national saving equal to investment plus net exports?

Answer 1

Answer:

A] Marginal propensity to consume = change in consumption / change in income

= (11-5)/(10-0)= 0.6

B]

Income	Expenditure	C	I	G	X
0	16	5	5	4	2
10	22	11	5	4	2
20	28	17	5	4	2
30	34	23	5	4	2
40	40	29	5	4	2
50	46	35	5	4	2
60	45	34	5	4	2
70	58	47	5	4	2
80	64	53	5	4	2
90	70	59	5	4	2
100	76	65	5	4	2

At equilibrium Y= C+G+I+NX

This happens when Y= 40 billion

C]

National savings = Y-C-G

= 40-29-4= 7 billion

Investment + net exports = 5+ 2= 7 billion = national savings