Question

Macroeconomics Assignment 2 1. The table shows disposable income and consumption expenditure in an economy. Use the table to work Problems A and B. Disposable Consumption income expenditure (Billions of dollars) 800 1,000 A. Calculate saving at each level of disposable income. Over what range of disposable income does consumption expenditure exceed disposable income? Calculate autonomous consumption expenditure. B. Calculate the marginal propensity to consume. At what level of disposable income will savings be zero? If expected future income increases, in which direction will the consumption function change?

Answer 1

Disposable income	Consumption expenditure	Disposable income-Consumption expenditure= Savings
200	350	-150
400	500	-100
600	650	-50
800	800	0
1000	950	50

A. Consumption expenditure exceeds disposable income when disposable income is from 200 to 600

Marginal propensity to consume= ∆C/∆Y= (500-350)/(400-200)=0.75

Consumption function= Autonomous consumption+ MPC*disposable income

350= Autonomous consumption+0.75*200

Autonomous consumption= 350-150=200

Autonomous consumption=200

B. Marginal propensity to consume= ∆C/∆Y= (500-350)/(400-200)=0.75

Savings=0 when Consumption expenditure= Disposable income=800.

If future expected income rises, consumption function has positive change. As there is positive relationship between disposable income and Consumption expenditure.