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Chapter 12: Q. 16 (page 278)

Take a look at Table 12-2 and consider the changes in planned real consumption and saving associated with an increase in real GDP from \(14.0 trillion to \)15.0 trillion to calculate the marginal propensity to consume.

Short Answer

Expert verified

The marginal consume propensity isMPC=0.025.

Step by step solution

01

Step: 1 Overall cost: 

The overall cost for all services / goods in the economy is known as aggregate demand. Consumption spending , investment , and government expenditure make up the closed economy. However, in an open economy, it comprises not only these but also exporting and imports .

It can be stated mathematically a Y=C+I+G+X-M.

02

Step: 2 Graph: 

When the current price is 100, real GDP is $14trillion; however, when the market price is raised to 110, real GDP decreases to $15trillion. The demand curve, which displays the inverse relationship between level of prices and real GDP, will trend upward.

03

Step: 3 Finding value: 

Marginal Propensity to Consume is the amount of change in consumption due to change in income level. It can also be written as MPC.

Therefore, MPCcan be computed as shown below:

MPC=鈭�C鈭�Y

MPC=0.104

MPC=0.025.

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Most popular questions from this chapter

Consider Table 12-2. What is the average propensity to consume at the equilibrium level of real GDP? What is the average propensity to save?

In light of the fact that a fall in real net wealth during a recession causes real saving to increase, does the saving function shift upward or downward when real net wealth decreases? Explain your reasoning.

How might recent increases in state and federal tax rates on incomes that businesses derive from capital investment have contributed to the investrment function's failure to rebound?

Consider the table below when answering the following questions. For this economy, the marginal propensity to consume is constant at all levels of real GDP, and investment spending is autonomous. Equilibrium real GDPis equal to \(8,000. There is no government.


a. Complete the table. What is the marginal propensity to consume? What is the marginal propensity to save?

b. Draw a graph of the consumption function. Then add the investment function to obtain C+I.

c. Under the graph of C+I, draw another graph showing the saving and investment curves. Does theC+Icurve cross the45-degree reference line in the upper graph at the same level of real GDPwhere the saving and investment curves cross in the lower graph, at the equilibrium real GDPof \)8,000? (If not, redraw your graphs.)

d. What is the average propensity to save at equilibrium real GDP?

e. If autonomous consumption were to rise by $100, what would happen to equilibrium realGDP?

At an initial point on the aggregate demand curve, the price level is 125 , and real GDP is \(18 trillion. When the price level falls to a value of120 , total autonomous expenditures increase by \)250 billion. The marginal propensity to consume is 0.75. What is the level of real GDP at the new point on the aggregate demand curve?
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