Question

Collabon Short-Answer, Essays, and Problems 1. What are the relationships among consumption, saving, and disposable income? 2. Define the consumption schedule. 3. Describe the saving schedule. 4. Explain how consumption and saving are related to disposable income in the aggregate expenditures model. 5. Fill in the table below. Describe your result. Disposable Income Consumptio Saving $200 $210 $ $220 $230 $10 $260 $20 $280 $300 6. Complete the following table assuming that (a) MPS - 1/5, (b) there is no government and all saving is personal saving. Level of output and Income Consumptio Saving $250 $260 275 375 7. Complete the following table assuming that (a) MPS - 1/3. (b) there is no government and all saving is personal saving Level of output and Consumptio Saving $100

Answer 1

(1) The relationship among consumption, saving and disposable income depicted below;

Disposable income = Consumption + Saving.

(2) The consumption schedule is a table that shows the relationship between consumption and disposable income.

(3) The saving schedule is a table that shows the relationship between saving and disposable income.

(4) Consumption and saving are directly related to disposable income in the aggregate expenditure model.

Consumption is a part of disposable income which spent and saving is a part of disposable income which is not spent.

Disposable income = Consumption + Saving.

(5)

Disposable income	Consumption	Saving
200	210	-10
220	220	0
240	230	10
260	240	20
280	25	30
300	260	40

Disposable income = Consumption + Saving.

Consumption = Disposable income - saving

Saving = Disposable income - Consumption.

(6) MPS = 1/5.

MPC + MPS = 1

MPC = 1 - MPS

MPC = 1 - 1/5

MPC = 4/5

In the given table, there is increase in income by $25 every time.

Since there is no government, so disposable income is equal to income [Disposable income = Income - tax]

So, there is an increase in disposable income by $25 every time.

MPC = dC / dYD

Where, dC is change in consumption.

dYD is change in disposble income.

MPC = dC / dYD

(4 /5) = dC / $25.

dC = (4 /5) * $25

dC = $20.

it means every $25 increase in disposable income leads to increase in consumption by $20.

Level of output and income	Consumption	Saving
250	200	50
275	220	55
300	240	60
325	260	65
350	280	70
375	300	75
400	320	80

(7)

MPS = 1/3.

MPC + MPS = 1

MPC = 1 - MPS

MPC = 1 - 1/3

MPC = 2/3

In the given table, there is increase in income by $30 every time.

Since there is no government, so disposable income is equal to income [Disposable income = Income - tax]

So, there is an increase in disposable income by $30 every time.

MPC = dC / dYD

Where, dC is change in consumption.

dYD is change in disposble income.

MPC = dC / dYD

(2/3) = dC / $30.

dC = (2/3) * $30

dC = $20

it means every $30 increase in disposable income leads to increase in consumption by $20.

Level of output and income	Consumption	Saving
100	120	-20
130	140	-10
160	160	0