Ask a new question: \"In a simple economy (assume there are no taxes; thus, Y is

Question

Ask a new question: "In a simple economy (assume there are no taxes; thus, Y is disposable income), the consumption function is: C = 200 + 0.80Y. The current level of real GDP is $3000 At this level of real GDP, consumption will be $___, and savings will be $___. If GDP were to increase by $1000, consumption would increase by $___. (round your responses to the nearest dollar.) At a real GDP level of $3000 the average propensity to consume is ___, and the average propensity to save is ___. (round your answers to two decimal places.)..."

Explanation / Answer

where: C is consumption expenditures, Y again is income, a is the intercept, and b is the slope.

In this case, the saving function can be specified as:

consumtion C=200+0.80Y
GDP=3000$
so Consumption= 200+0.80*3000=2600$
Saving= -200+(1-0.80)Y= - 200+0.20*3000=400$


now GDP is =4000$
  Consumption=200+0.80*4000=3400$, SO consumption is increased by 800$
  saving= 4000-3400=600$

Average propensity to consume (APC) =Total Consumption Expenditure/Total Disposable Incom
   =2600/3000=0.87
Average propensity to save (APS) =Total Saving Expenditure/Total Disposable Income

= 400/3000=0.13

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