a) Explain why individuals may try to smooth their consumption over their lifetime. Illustrate this concept with a diagram. b) Explain how borrowing constraints can impede the process of consumption smoothing. If many households are affected by such constraints, explain how this may result in a "Keynesian" consumption function. c) In a closed economy Keynesian Cross framework show how a decline in investment will lead to a fall in income. Explain the role of the consumption function and the multiplier in this process.

a) Explain why individuals may try to smooth their consumption over their lifetime. Illustrate this concept with a diagram. b) Explain how borrowing constraints can impede the process of consumption smoothing. If many households are affected by such constraints, explain how this may result in a "Keynesian" consumption function. c) In a closed economy Keynesian Cross framework show how a decline in investment will lead to a fall in income. Explain the role of the consumption function and the multiplier in this process.

Economics (MindTap Course List)

13th Edition

ISBN:9781337617383

Author:Roger A. Arnold

Publisher:Roger A. Arnold

Chapter10: Keynesian Macroeconomics And Economic Instability: A Critique Of The Self Regulating Economy

Section: Chapter Questions

Problem 7QP

See similar textbooks

Similar questions

(a)‌Elaborate‌ ‌‌THREE‌ ‌(3)‌ ‌determinants‌ ‌in‌ ‌which‌ ‌consumption‌ ‌can‌ ‌be‌ ‌increased‌ ‌according‌ ‌to‌ ‌the‌ ‌consumption‌ ‌function.‌ ‌ ‌ (b)‌Assume‌ ‌that‌ ‌a‌ ‌three-sector‌ ‌economy‌ ‌in‌ ‌Country‌ ‌W.‌ ‌The‌ ‌amount‌ ‌of‌ ‌ autonomous‌ ‌consumption‌ ‌is‌ ‌RM300‌ ‌million‌ ‌with‌ ‌the‌ ‌proportion‌ ‌of‌ ‌an‌ ‌increase‌ ‌in‌ ‌income‌ ‌that‌ ‌is‌ ‌spent‌ ‌on‌ ‌consumption‌ ‌is‌ ‌0.5.‌ ‌An‌ ‌induced‌ ‌tax‌ ‌of‌ ‌20%‌ ‌is‌ ‌imposed‌ ‌by‌ ‌the‌ ‌country.‌ ‌The‌ ‌amount‌ ‌of‌ ‌investment‌ ‌is‌ ‌RM250‌ ‌million,‌ ‌and‌ ‌the‌ ‌amount‌ ‌of‌ ‌government‌ ‌spending‌ ‌is‌ ‌RM150‌ ‌million.‌ ‌ ‌ ‌ (i)‌Calculate‌ ‌the‌ ‌national‌ ‌income‌ ‌equilibrium.‌ ‌ ‌ ‌ (ii)‌Based‌ ‌on‌ ‌your‌ ‌answer‌ ‌in‌ ‌(i),‌ ‌show‌ ‌the‌ ‌aggregate‌ ‌expenditure‌ ‌graph.‌ ‌ ‌ ‌ (iii)‌Explain‌ ‌what‌ ‌would‌ ‌happen‌ ‌to‌ ‌the‌ ‌national‌ ‌income‌ ‌equilibrium‌ ‌if‌ ‌the‌ ‌ investment‌ ‌changes‌ ‌by‌ ‌RM100‌ ‌million.‌
Q.1.14 In the Keynesian model, what is the most important determinant of ahousehold’s consumption?(a) Disposable income.(b) Total wealth.(c) The number of persons in the household.(d) Its’ net wealth. Q.1.15 Induced consumption is: (a) the part of consumption which is independent of the level of income.(b) the minimum level of consumption that is financed from sources otherthan income.(c) The maximum level of consumption that is financed from sources otherthan income.(d) shown by the slope of the consumption function.Q.1.16 In the Keynesian model, an introduction of a proportional tax will: (a) increase the slope of the consumption function.(b) reduce the multiplier.(c) increase the equilibrium level of income.(d) increase the multiplier.Q.1.17 A decrease in the price level will: (a) shift the AS curve to the left.(b) shift the AD curve to the left.(c) shift the AS curve to the right.(d) leave both the AD curve and the AS curve unchanged.
Question 2: a. Discuss and graphically depict Keynes’s three conjectures about the consumption function. b. Present and explain Keynesian’s consumption function that was created from these conjectures c. What is meant by "autonomous consumption"? ) d. Explain the consumption puzzle? e. How does the Life-Cycle Hypothesis resolve the puzzle?
The Simple Keynesian Model (i.e., the income-expenditure model). Assume: C = 150 + 0.9 DI I = 50 DI = C + I in equilibrium for a 2-sector model (Note: DI = C in a 1-sector model) Define the term, consumption. What is the value of “autonomous” consumption (also called “a” or the vertical intercept)? What is the value of the slope (also referred to as “b”) of the consumption function? There’s another name for the slope of the consumption function. What is it? What is the value of DI when the model is in equilibrium? What is the value of the “oversimplified” expenditure multiplier? If full-employment means that DI = $5000, then how much should autonomous consumption (or autonomous investment) increase to achieve full-employment? (Hint: Use the multiplier process formula.) Draw a graph of this 2-sector model. Indicate equilibrium DI, full-employment DI, as well as…
Hello . Can you please assist with the following queston below Q.1 State the three possible relationships between production, income andspending in macroeconomic theory. Q.2 Explain the relationship between consumption and saving in the Keynesian model.
1. Induced consumption is: (a) the part of consumption which is independent of the level of income.(b) the minimum level of consumption that is financed from sources otherthan income.(c) The maximum level of consumption that is financed from sources otherthan income.(d) shown by the slope of the consumption function.2. In the Keynesian model, an introduction of a proportional tax will: (a) increase the slope of the consumption function.(b) reduce the multiplier.(c) increase the equilibrium level of income.(d) increase the multiplier.3. A decrease in the price level will: (a) shift the AS curve to the left.(b) shift the AD curve to the left.(c) shift the AS curve to the right.(d) leave both the AD curve and the AS curve unchanged.
(Building IS–LM Model) In the Keynesian cross, assume that the consumption function is given by C = 200 + 0.75 (Y − T ). Planned investment is 100; government purchases and taxes are both 100. A. Graph planned expenditure as a function of income. B. What is the equilibrium level of income? C. If government purchases increase to 125, what is the new equilibrium income? D. What level of government purchases is needed to achieve an income of 1,600?
b. From the Intertemporal Choice Model, many theories (non-Keynesian theories ofConsumption) came into being. Using graphical and mathematical expressions, compareand contrast the following theories on consumption behaviours:i. Franco Modigliani: Life-Cycle Hypothesisii. Milton Friedman: Permanent-Income Hypothesisiii. Robert Hall: Random Walk Hypothesis
1. Define marginal propensity to consume. Explain its relationship with marginal propensity to save. 2. Distinguish between MPC and APC. 3. Estimate the marginal propensity to consume in an economy in which the aggregate consumption expenditure from k400 000 to 500 000. 4.define the multiplier. Apart from income generation via the multiplier process, what other important role does investment play in an underdeveloped economy? Define inflation. With the help of diagrams bring out the distinction between cost push and demand pull inflation. Are the economic effects of inflation identical for all sections of society. Discuss giving comprehensive examples. Using the IS- LM model, discuss how equilibrium is attained in the money and products market distinctively, to arrive at the general level of equilibruim in an economy. What happens to interest rates as prices change along a given AD schedule? Explain using the IS - LM model. Explain the fixed and flexible exchange rates. What is the…
Suppose in a simple Keynesian economy, planned consumption function is given by C=250+0.65(Y-T). Planned investment, government purchases, taxes are $100 million, $100 million and $150 million respectively. 3. If government purchases increase to $150 million, what is the new equilibrium level of income? 4. What level of government purchases is needed to achieve an income of $2000 million? 5. From question e) you get the newly government purchase. Now find out the multiplier value 6. What is the amount of shift in AD curve? [Use the multiplier value from (5)]
It is found that the consumption function for the economy is C = 50 + 0.8 Y d . Current level of output is 8800 and the potential GDP is 9000. Assuming the Keynesian view of the short run, answer the following questions. Illustrate this economy using a carefully labeled diagram. What is a larger concern for this economy: unemployment or inflation? If the economic policy makers want to bring the level of output to the potential GDP by changing the government expenditures (G), how much do they need to change G? Be sure to indicate whether the change is an increase or decrease. True or False and explain: If the policy in part c was successful, the unemployment rate will be zero.
In the Keynesian cross, assume that the consumption function is given by C = 200 + 0.75 (Y − T). Planned investment is 100; government purchases and taxes are both 100. (solve three tasks) Graph planned expenditure as a function of income. What is the equilibrium level of income? If government purchases increase to 125, what is the new equilibrium income?