(Advanced Analysis) Linear equations for the consumption and saving schedules ta

Question

(Advanced Analysis) Linear equations for the consumption and saving schedules take the general form:

C = a + bY

and

S = - a + (1 - b)Y

where C, S, and Y are consumption, saving, and national income, respectively. The constant a represents the vertical intercept, and b represents the slope of the consumption schedule.

a. Use the following data to substitute specific numerical values into the consumption and saving equations.

National
Income (Y) Consumption (C)
$ 0 $75
100 150
200 225
300 300
400 375

Instructions: If you are entering any negative numbers, be sure to include a negative sign (-) in front of those numbers.

C = $ + Y

S = $ + Y



b. Suppose that the amount of saving that occurs at each level of national income falls by $20 but that the values of b and (1 - b) remain unchanged. Restate the saving and consumption equations inserting the new numerical values.

Instructions: If you are entering any negative numbers, be sure to include a negative sign (-) in front of those numbers.

C = $ + Y

S = $ + Y

Explanation / Answer

Linear equations for the consumption schedules take the general form: C=a+bY andLinear equations for the saving : S=(1-b)Y-a A) a = 80 b = 0.6 (for extra income of 100 - consumption increment for 60) C=80+0.6Y S=(1-0.6)Y-80 = 0.4Y-80 B) b = MPC(marginal propensity to consume) (1-b) = MPS(marginal propensity to save ) MPS+MPC=1 b + (1-b) = b+1-b = 1 C) S =0.4Y-80 - 20 = 0.4Y-100 a = 100 C=100+0.6Y Essential goods can have higher prices.

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