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Elaborate on the difference between a binding and non-binding borrowing constraints and the
two consumption functions that result.
b. From the Intertemporal Choice Model, many theories (non-Keynesian theories of
Consumption) came into being. Using graphical and mathematical expressions, compare
and contrast the following theories on consumption behaviours:
i. Franco Modigliani: Life-Cycle Hypothesis
ii. Milton Friedman: Permanent-Income Hypothesis
iii. Robert Hall: Random Walk Hypothesis
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- 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 HypothesisQuestion Two a. Explain the difference between a binding and non-binding borrowing constraints and thetwo consumption functions that result.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 HypothesisFrom the Intertemporal Choice Model, many theories (non-Keynesian theories of Consumption) came into being. Using graphical and mathematical expressions, compare and contrast the following theories on consumption behaviours:i. Franco Modigliani: Life-Cycle Hypothesisii. Milton Friedman: Permanent-Income Hypothesisiii. Robert Hall: Random Walk Hypothesis
- The Life-Cycle/Permanent Income Model of Consumption makes a different prediction from the Keynesian Model, about how Consumption reacts to an increase in current income. Which of the following is the best description of the difference? O In the Keynesian Model, consumers will increasktheir spending by the mpc times the increase in income. In the Life-Cycle/Permanent Income Model, consumers will not increase their spending by much unless they believe that the increase in their income is permanent. O In the Life-Cycle/Permanent Income Model, consumers will increase their spending by the mpc times the increase in income. In the Keynesian Model, consumers will only increase their spending if they believe that the increase in their income is temporary. O In the Keynesian Model, consumers will increase their spending by the mpc times the increase in income. In the Life-Cycle/Permanent Income Model, consumers will only increase their spending if they believe that the increase in their income…Use the information in the following table to answer the questions below. Assume you are dealing with short-run aspects of the economy, so the marginal propensity to consume is constant. Also, for simplicity, assume this economy has no taxes. In your answers, expain brifly how did you get the numerical result. Real GDP Consumption PlannedInvestment GovernmentPurchases Net Exports $9,000 $7,800 $1,500 $1,000 -$700 $10,000 $8,600 $1,500 $1,000 -$700 $11,000 $9,400 $1,500 $1,000 -$700 $12,000 $10,200 $1,500 $1,000 -$700 $13,000 $11,000 $1,500 $1,000 -$700 $14,000 $11,800 $1,500 $1,000 -$700 (a) What is the equilibrium level of real GDP in this economy? (b) Compute the marginal propensity to consume. (c) Compute the government expenditures multipler. (d) Suppose net export increases by $400 (Assuming MPC, Gevernment Purchases, and Planned Investment are the same). What will be the new equilibrium level of GDP? Consumption?10. Consider a one-period economy which experiences the destruction of some of the nation's capital stock (say through a hurricane is de- stroyed). How should this effect equilibrium, consumption, output and labor supply? Now, let's say the government tries to offset some of the declines in capital on output and hours worked by increasing govern- ment spending. What is the likely outcome of this policy intervention in terms of consumption?
- Use the information in the following table to answer the questions below. Assume you are dealing with short-run aspects of the economy, so the marginal propensity to consume is constant. Also, for simplicity, assume this economy has no taxes. In your answers, expain brifly how did you get the numerical result. Real GDP Consumption PlannedInvestment GovernmentPurchases Net Exports $9,000 $7,800 $1,500 $1,000 -$700 $10,000 $8,600 $1,500 $1,000 -$700 $11,000 $9,400 $1,500 $1,000 -$700 $12,000 $10,200 $1,500 $1,000 -$700 $13,000 $11,000 $1,500 $1,000 -$700 $14,000 $11,800 $1,500 $1,000 -$700 (d) Suppose net export increases by $400 (Assuming MPC, Gevernment Purchases, and Planned Investment are the same). What will be the new equilibrium level of GDP? Consumption?Question 8 Which of the following is correct as an interpretation of the Keynesian consumption function? None of the others is correct O The Keynesian consumption function implies that your consumption depends on your overall wealth, rather than your current income. O The Keynesian consumption function states that as income increases consumption increases more than proportionately. The Keynesian consumption function is consistent with the observation that consumption can increase even if disposable income remains the same. The Keynesian consumption function predicts that if your current income is less than your expected future income, you should borrow today to finance your current consumption needs.Suppose Congress decides to reduce the budget deficit by cutting government spending. a. Use the Keynesian-cross model to illustrate graphically the impact of a reduction ingovernment purchases on the equilibrium level of income. Be sure to label: i) the axes;ii) the curves; iii) the initial equilibrium values; iv) the direction the curve shifts; andv) the terminal equilibrium values. b. Explain what happens to equilibrium income as a result of the cut in governmentspending.
- levels of in come The equilibrium levels of income Y consumptiion C, disposable income Yo and a three- Sector macroeconomic model Satis.fy the Structural equatione taxation T, for %3D C + In t Go C=atbld (ocbel, a>o) Y-T TE tY + To o >o) ☺ Express Ax=d Ü Using Cramer's rule, find the equilibrium levels of consumption (^), dis poseble in come CYo and Taxation (Tr) this System ln the formLast year, Jim and Matthew both spent about two third of their income on consumption. This year, each receive a large bonus at work. Jim immediately spends two third of his bonus on a new TV. Matthew increases consumption slightly, spending a small percentage of the bonus each month. Which of the following is true? O a. Both Jim and Matthew's behaviors are more consistent with a Keynesian consumption function than Friedman's permanent income hypothesis O b. Both Jim and Matthew's behaviors are more consistent with Friedman's permanent income hypothesis than a Keynesian consumption function O c. Jim's behavior is most consistent with Friedman's permanent income hypothesis, while Matthew's is more consistent with a Keynesian consumption function d. Jim's behavior is most consistent with a Keynesian consumption function, while Matthew's is more consistent with Friedman's permanent income hypothesis A firm produces 1000 units of its product, which it expects to be able to sell to the…*4. Data on before-tax income, taxes paid and consumption spending (on domestic goods and services) for the Simpson family in various years are given below. BEFORE-TAX INCOME (S) TAX PAID (S) CONSUMPTION SPENDING (S) 3000 3500 3700 4000 25 000 27 000 28 000 30 000 20 000 21 350 22 070 23 600 a. Graph the Simpsons's consumption function and find their household's marginal propensity to consume. b. How much would you expect the Simpsons to consume if their income was $32 000 and they paid taxes of $5000? c. Homer Simpson wins a lottery prize. As a result, the Simpson family increases its consumption by $1000 at each level of after-tax income. ("Income' does not include the prize money.) How does this change affect the graph of their consumption function? How does it affect their marginal propensity to consume?