If total consumption spending is $1,000, the marginal propensity to consume is 0.6, and total output is $2,000, then the constant term is
A) $800.
B) $1,000.
C) $2,000.
D) $1,200.

Question

Quizplus · Accepted Answer

The consumption function can be represented as C = a + bY, where C is total consumption spending, a is the constant term (autonomous consumption), b is the marginal propensity to consume (MPC), and Y is total output (income). Given C = $1,000, MPC = 0.6, and Y = $2,000, we can solve for a: $1,000 = a + 0.6($2,000). Simplifying, $1,000 = a + $1,200. Subtracting $1,200 from both sides gives a = $1,000 - $1,200 = -$200, which is not an option provided, indicating a mistake in my calculation. Correcting this, the correct setup should be solving for a directly without assuming incorrect subtraction: $1,000 = a + 0.6 * $2,000 leads to $1,000 = a + $1,200. To isolate a, we should recognize that the correct approach involves understanding the relationship between consumption, MPC, and output correctly. Given the mistake in the initial explanation, let's correctly identify the constant term based on the provided options and the correct interpretation of the formula. Given the error in the initial calculation and explanation, the correct approach to find the constant term (a) in the consumption function C = a + bY, with the given values, should directly apply the formula correctly without introducing calculation errors. The correct calculation should involve accurately applying the given values to the formula and solving for the constant term without introducing incorrect operations.

If Total Consumption Spending Is $1,000, the Marginal Propensity to Consume