Problem 1: Consumption 1.1 What is the impact of a temporary tax cut on current consumption according to: a. the Keynesian consumption function? Explain your answer briefly. b. the permanent-income hypothesis? Explain your answer briefly.
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- Q.1.7 In the Keynesian macroeconomic model, the equation for the savings function is given as: S = -420 + 1/4Y. Based on this information, which of the following statements is correct? (1) The marginal propensity to consume is 1/4; (2) The marginal propensity to save is -420;look at the keynesian consumption function:c=c0+(mpc)(yd).which part of it relates to autonomous consumption?which part of it relates to included consumption?define autonomous consumption and induced consumptionSuppose 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)]
- Which of the following statements about the Keynesian framework are accurate? a)Keynes posited a linear Consumption function C=Ca + mpcYd, where C is total desired consumption spending, Ca is consumption spending independent of income and Yd is disposable income and mpc is marginal propensity to consume b) In the C=Ca +mpcYd the Ca is the vertical axis intercept parameter, and mpc is the slope parameter. c) Keynes also posited that Investment spending was a function of expectations and the interest rate. d) In the Keynesian investment function the firm's estimated profitability of potential investment projects were determined by expectations of future sales and costs. e) Businesses would invest in those projects whose estimated profitability was greater than the market rate of interest. f) If the firms don't have the cash, they will borrow funds and earn the difference between the rate of return on the project and the lower market rate of interest. If they have more cash than needed…Question 3. Using the Keynesian-cross analysis, assume that the consumption function is given by C = 200 + 0.7 (Y – T). If the planned investment is 50 and T is 100, then what is the level of G needed to make equilibrium Y equal 1,000?Consumption and Saving- End of Chapter Problem Which one of the following reasons makes it easier to forecast the impact of an income change on consumption for hand-to-mouth consumers than for consumption smoothers? It is easier because hand-to-mouth consumers only spend their permanent income. hand-to-mouth consumers save a large portion of their income. the marginal propensity to consume is 1 for consumption smoothers. hand-to-mouth consumers spend their entire income as they earn it.
- Suppose disposable income increases by $2,000$2,000. As a result, consumption increases by $1,500$1,500. Answer the questions based on this information. Where appropriate, enter your answer as a decimal rather than as a percentage. 1) The increase in savings resulting directly from this change in income is 2)The marginal propensity to save (MPS) is 3)The marginal propensity to consume (MPC) isAssignment: Keynesian Algebra 1. Identify the consumption function and the saving function. What is the slope of the consumption function? What is the y-intercept of the consumption function? What is the slope of the saving function? What is the y-intercept of the saving function?You are provided with the following information about an imaginary economy called Keynesia: Government expenditure 400 Exports 250 Autonomous imports 50 Autonomous consumption 150 Investment expenditure 300 Full- employment output 1900 Marginal propensity to consume 0.75 Marginal propensity to import 0.15 Tax rate 0.25 Required (I) Derive the IS equation (ii) Derive the savings function (iii) Calculate the equilibrium level of income using the aggregate expenditure approach. (iv) What would the value of income be if the trade balance is zero? (v) What would the value of income be if autonomous consumption increases by 50
- Suppose that autonomous consumption (a) is 300, private investment spending (I) is 420,government spending (G) is 400 , Net taxes (T) are 400 and marginal propensity to consume(b) is 80 %, and marginal tax rate (t) is 25 % . By using the above information: b) Suppose that the potential income level is 2500 in the economy. In this case, what kind offiscal policy you can use to reach the full employment level. (show this numerically andexplain it on your graph)Which of the following statements about consumption is correct? (1) The level of autonomous consumption determines the position of theconsumption function;(2) The marginal propensity to consume determines the position of theconsumption function;(3) The level of autonomous consumption determines the slope of theconsumption function;(4) The level of income determines the slope of the consumption function.a) Draw a consumption function and label the axes.b) Suppose that your friend has a consumption function of the form y=1.4x+200. Is this function sustainable in the long run? Why or why not?c) Suppose that your consumption function is y=0.75+1000. What is your marginal propensity to consume? What is your autonomous expenditure?d) State the permanent income hypothesis.e) Suppose that I raise your income today by $10, and lower it tomorrow by $10. How would your behavior change according to the consumption function (aka Keynesian, aka rule-of-thumb) model? And what about according to the permanent income hypothesis model?