Question

Output and APS MPC MPS 3480 $4888 1.0167 -00167 08 02 10 0.8 0.2 0.2 0.2 1.0000 0.8 0.9857 0.01430.8 584 | 16 | 0.9733| 0.0267| 0.8 | 0.2 | 616 24 0.9625 320.0375 0.9444 nook680 0.2 0.2 0.2 760 71248 0.9368 0.0632 08 02 0.2 648320.9529 0.0471 08 40 0.0556 0.8 Print 744 0.9300 0.0700 0.8 Suppose the wealth effect is such that a $10 change in wealth produces a $1 change in consumption at each level of income real estate prices tumble such that wealth declines by $160. Instructions: Enter your answers as whole numbers. a What will be the new level of consumption at the $680 billion level of disposable income? b. What will be the new level of saving?

Answer 1

Wealth effect is such that $10 change in wealth produces $1 change in consumption at each level of income.

A $160 decrease in wealth will decrease the consumption by $16 at each level of income.

(A) initially at $680 level of income, consumption was $648. After the wealth decrease by $160 the consumption will fall by $16.

So, the new level of consumption at $680 income is $632.

I.e., new consumption = $648 - $16 = $632.

(B) new level of saving = $680 - $632.

New level of saving = $48.