Economics: Principles & Policy
14th Edition
ISBN: 9781337912679
Author: William J. Baumol; Alan S. Blinder; John L. Solow
Publisher: Cengage Learning US
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Question
Chapter 24, Problem 4TY
To determine
A shift in consumption function.
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If the price level increases, what happens to the consumption function? Why?
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Chapter 24 Solutions
Economics: Principles & Policy
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- On the following graph, plot the aggregate demand curve that results from varying the price level from 110 to 130 to 150, holding all else equal.arrow_forwardWhat is this household's marginal propensity to consume at c1 (in percent)?arrow_forwardSuppose you know the following facts about consumer behavior of Amy in 2019. In a year, Amy spends $10000 on basic household items regardless of how much she is earning. For every dollar of disposable income earned, Amy spends 50% on extra purchases. Amy pays taxes in the amount of $1000, and receives no transfers. Use this information to: Derive Amy’s consumption function in nominal terms. Suppose the price level index in the economy for 2019 is estimated to be P = 2. Rewrite the consumption function in real terms.arrow_forward
- Consider a hypothetical economy in which the marginal propensity to consume (MPC) is 0.75. That is, if disposable income increases by $1, consumption increases by 75¢. Suppose further that last year disposable income in the economy was $500 billion and consumption was $450 billion. On the following graph, use the blue line (circle symbol) to plot this economy's consumption function based on these data.arrow_forwardConsider a hypothetical economy in which the marginal propensity to consume (MPC) is 0.75. That is, if disposable income increases by $1, consumption increases by 75¢. Suppose further that last year disposable income in the economy was $500 billion and consumption was $450 billion. On the following graph, use the blue line (circle symbol) to plot this economy's consumption function based on these data. Fill in the blanks From the preceding data, you know that the level of saving in the economy last year was ____________billion and the marginal propensity to save in this economy is ___________. Suppose that this year, disposable income is projected to be $700 billion. Based on your analysis, you would expect consumption to be _______ billion and saving to be ________ billion.arrow_forwardWhich equation represents the macroeconomic equilibrium condition in the aggregate expenditure (AE) model?arrow_forward
- Draw the consumption function as the relation of the consumer's income and expenditure. What does the slope of the consumption function depend on? Is the consumer's income the only factor determining the level of his consumption spending?arrow_forwardClearly explain the characteristics of the consumption function.arrow_forwardIt is possible that the interest rate might affect consumption spending. An increase in the interest rate could, in principle, lead to increases in saving and therefore a reduction in consumption, given the level of income. Suppose that consumption is, in fact, reduced by an increase in the interest rate. How will the IS curve be affected?arrow_forward
- The consumption demand function merely states that as income goes up, households consume all their increased incomearrow_forwardName two macroeconomic variables that decline when the economy goes into a recession. Name one macroeconomic variable that rises during a recession.arrow_forwardSuppose you estimate the consumption functionarrow_forward
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