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 calculated using the equation C = a + (mpc)(Y-T), where a is autonomous consumption (total spending that occurs even when income is zero) and Y-T is disposable income (income after taxes). Using the given values, we can calculate the consumption function as C = 350 + (0.80)(Y-0.15Y) = 350 + (0.68)Y. Therefore, the correct choice is C.

The Diagram Below Shows Desired Aggregate Expenditure for a Hypothetical