Suppose that the marginal propensity to consume is (in billions of dollars) and that consumption is $5.35 billion when disposable income is 0. Find the national consumption function C. If it's necessary, round your calculations to two decimal places.

Question

Suppose that the marginal propensity to consume is  (in billions of dollars) and that consumption is $5.35 billion when disposable income is 0. Find the national consumption function C. If it's necessary, round your calculations to two decimal places.

Quizplus · Accepted Answer

We know that the consumption function is given by: 
C = a + b(Yd)
where, 
C = consumption
a = autonomous consumption
b = marginal propensity to consume (MPC)
Yd = disposable income

We are given that when disposable income is 0, consumption is $5.35 billion. This implies that autonomous consumption is $5.35 billion (because there is no disposable income to consume). Hence, we have:
a = 5.35

We are also given that MPC = 0.11. Hence, we have:
b = 0.11

Therefore, the consumption function is:
C = 5.35 + 0.11Yd

Hence, the answer is B.

Suppose That the Marginal Propensity to Consume Is (In