The diagram below shows desired aggregate expenditure for a hypothetical economy.Assume the following features of this economy: • marginal propensity to consume (mpc) = 0.80
• net tax rate (t) = 0.15
• no foreign trade
• fixed price level
• all expenditure and income figures are in billions of dollars. FIGURE 22-3
Refer to Figure 22-3.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) = 0.80
• net tax rate (t) = 0.15
• no foreign trade
• fixed price level
• all expenditure and income figures are in billions of dollars.

FIGURE 22-3
Refer to Figure 22-3.Which of the following correctly describes the consumption function for this economy?

Quizplus · Accepted Answer

The consumption function can be determined by finding the intercept of the expenditure line where it intersects with the vertical axis. In this case, it is at $350 billion. Since the MPC is 0.80, we can multiply it by the level of disposable income (1-t)Y to get the consumption function. Therefore, it is C = 350 + (0.68)Y.

The Diagram Below Shows Desired Aggregate Expenditure for a Hypothetical