Consider the following two-period consumption-saving model: Max C (BC2), C1,C2 subject to the following constraints Y1 =C1+S, Y2 = C2 – (1+r)S. 1. Solve for the intertemporal budget constraint 2. Draw the budget constraint (in a graph) with Y1 = 140, Y2 = 70, and r = 0.25. Be sure to label the maximum values of C1 and C2 on the y-axis and x-axis. %3D 3. Suppose that ß = 0.8, solve for the optimal values of consumption, C and C3. %3D 4. Compare your consumption function for period 1 to a consumption function suggested by John Maynard Keynes (the so-called Keynesian consumption function). Are they different? 5. When r does down, how does C1 change? Does it increase or decrease? Show this mathe- matically. 6. Compute the marginal propensity to consume in period 1. Does this fall in the range sug- gested by Keynes?

Consider the following two-period consumption-saving model: Max C (BC2), C1,C2 subject to the following constraints Y1 =C1+S, Y2 = C2 – (1+r)S. 1. Solve for the intertemporal budget constraint 2. Draw the budget constraint (in a graph) with Y1 = 140, Y2 = 70, and r = 0.25. Be sure to label the maximum values of C1 and C2 on the y-axis and x-axis. %3D 3. Suppose that ß = 0.8, solve for the optimal values of consumption, C and C3. %3D 4. Compare your consumption function for period 1 to a consumption function suggested by John Maynard Keynes (the so-called Keynesian consumption function). Are they different? 5. When r does down, how does C1 change? Does it increase or decrease? Show this mathe- matically. 6. Compute the marginal propensity to consume in period 1. Does this fall in the range sug- gested by Keynes?

Economics For Today

10th Edition

ISBN:9781337613040

Author:Tucker

Publisher:Tucker

Chapter18: The Keynesian Model

Section: Chapter Questions

Problem 9SQP

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Suppose that the linear equation for consumption in a hypothetical economy is C = 40 + .8Y. Also suppose that income (Y ) is $400. Determine (a) the marginal propensity to consume, (b) the marginal propensity to save, (c) the level of consumption, (d ) the average propensity to consume, (e) the level of saving, and ( f ) the average propensity to save.
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