The diagram below shows desired aggregate expenditure for a hypothetical economy.Assume the following features of this economy: • marginal propensity to consume (mpc)= 0.75
• net tax rate (t)= 0.20
• no foreign trade
• fixed price level
• all expenditure and income figures are in billions of dollars. FIGURE 22-2
Refer to Figure 22-2.Which of the following correctly describes the consumption function for this economy?

Question

The diagram below shows desired aggregate expenditure for a hypothetical economy.Assume the following features of this economy: • marginal propensity to consume (mpc)= 0.75
• net tax rate (t)= 0.20
• no foreign trade
• fixed price level
• all expenditure and income figures are in billions of dollars.  FIGURE 22-2
Refer to Figure 22-2.Which of the following correctly describes the consumption function for this economy?

Quizplus · Accepted Answer

The consumption function for this economy can be derived from the equation Y = C + I + G + NX (where I, G, and NX are assumed to be zero in this case). Rearranging the equation, we get C = Y - (T + S), where S is savings. Given that the net tax rate (T) is 0.20 and the marginal propensity to consume (mpc) is 0.75, we can write S = T(Y - T), and therefore C = 0.75(Y - 0.2Y) + 0.2Y = 75 + 0.55Y. Therefore, the correct choice is C.

The Diagram Below Shows Desired Aggregate Expenditure for a Hypothetical