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(Consumption) Use the following data to answer the questions below: Consumption Real Disposable Expenditures Saving Income | billions) (billions) (billions) $100 $150 $ $200 S200 $300$400 $250$300 Graph the consumption function, with consumption spending on the vertical axis and disposable income on the horizontal axis. If the consumption function is a straight line, what is its slope? Fill in the saving column at each level of income. If the saving function is a straight line, what is its slope?

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ECON MACRO

5th Edition
William A. McEachern
Publisher: Cengage Learning
ISBN: 9781337000529

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Chapter
Section
BuyFindarrow_forward

ECON MACRO

5th Edition
William A. McEachern
Publisher: Cengage Learning
ISBN: 9781337000529
Chapter 9, Problem 1.1P
Textbook Problem
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(Consumption) Use the following data to answer the questions below:

Consumption
Real Disposable Expenditures Saving
Income | billions) (billions) (billions)
$100 $150 $
$200 S200
$300$400 $250$300

  1. Graph the consumption function, with consumption spending on the vertical axis and disposable income on the horizontal axis.
  2. If the consumption function is a straight line, what is its slope?
  3. Fill in the saving column at each level of income. If the saving function is a straight line, what is its slope?

Sub- Part

A

To determine

Based on the data, Graphical representation of consumption function, with consumption spending on vertical axis and disposable income on horizontal axis.

Explanation of Solution

(a) − Following graph shows the consumption function in an economy.

  ECON MACRO, Chapter 9, Problem 1.1P , additional homework tip  1

Sub- Part

Economics Concept Introduction

Introduction: Consumption function represents the functional relationship between total consumption and gross national income. Consumer spending depends on three factors: disposable income (Yd), autonomous consumption (a), i.e. when income is zero, and induced income (b), i.e. the percentage of extra income that is spent. The formula for the same is C = a + b*Yd.

B

To determine

Based on the data, to find:

Slope, if consumption function is a straight line

Explanation of Solution

In case of a straight line, slope of the line remains constant or same everywhere along the line. So, if the consumption function is a straight line then its slope will remain same everywhere along it. The difference between two level of income and consumption will be constant. The slope of consumption function can be calculates as follows −

  ECON MACRO, Chapter 9, Problem 1.1P , additional homework tip  2

  ECON MACRO, Chapter 9, Problem 1.1P , additional homework tip  3

  ECON MACRO, Chapter 9, Problem 1.1P , additional homework tip  4

Thus, the slope of given consumption function is 0.5.

Sub- Part

Economics Concept Introduction

Introduction: Consumption function represents the functional relationship between total consumption and gross national income. Consumer spending depends on three factors: disposable income (Yd), autonomous consumption (a), i.e. when income is zero, and induced income (b), i.e. the percentage of extra income that is spent. The formula for the same is C = a + b*Yd.

C

To determine

Based on the data,

Find the Savings at each level of income and the slope when the saving function is a straight line.

Explanation of Solution

If the saving function is a straight line then its slope will remain constant. Difference between two level of income and saving will remain constant along the saving function. As saving function is a straight line, change in saving and income would be the same. Thus, the slope of saving function would be:

  ECON MACRO, Chapter 9, Problem 1.1P , additional homework tip  5

  ECON MACRO, Chapter 9, Problem 1.1P , additional homework tip  6

  ECON MACRO, Chapter 9, Problem 1.1P , additional homework tip  7

    Real Disposable Income (in billion $)Consumption Expenditure (in billion $)Savings (in billion $)
    100150-50
    2002000
    30025050
    400300100
Economics Concept Introduction

Introduction: Consumption function represents the functional relationship between total consumption and gross national income. Consumer spending depends on three factors: disposable income (Yd), autonomous consumption (a), i.e. when income is zero, and induced income (b), i.e. the percentage of extra income that is spent. The formula for the same is C = a + b*Yd.

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