Problem 10-5 (Algo) Use the table below to solve this problem. evel o Output and

Question

Problem 10-5 (Algo) Use the table below to solve this problem. evel o Output and Consumption Saving APC APS MPC MPS Income GDP DI $480 520 560 600 640 680 720 760 800 $512 536 560 584 608 632 656 680 704 1.0167 1.0000 0.9857 0.9733 0.9625 0.9529 0.9444 0.9368 0.9300 -0.0167 0.0000 0.0143 0.0267 0.0375 0.0471 0.0556 0.0632 0.0700 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 16 16 32 48 64 80 96 Suppose the wealth effect is such that a $10 change in wealth produces a $3 change in consumption at each level of income. Assume real estate prices tumble such that wealth declines by $320 Instructions: Enter your answers as whole numbers a.What will be the new level of consumption at the $680 billion level of disposable income? b. What will be the new level of saving?

Explanation / Answer

1) Solution: $632

Working: If wealth reduces by $160 and the wealth effect is in a way that a $10 change in wealth results to a $2 change in consumption at each level of income, then consumption will decline by $32 (= 0.2 * $160) at each level of income . This shows that consumption equals $632 at the income level of $680. Originally the consumption was $664 at this income level and the fall in wealth leads to a fall in consumption of $32.

2) Solution: $48

Working: $680 – $632 = $48

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