Sept 2010, #11

[MindFull]

Hey All,

I'm pretty confused by this question Sept 2010, #11. Some help please.

In an economy, economic agents have a marginal propensity to save of 0.25, an
income of £200 million and an autonomous expenditure of £15 million. The level of
consumption will be:
A £215 million.
B £165 million.
C £65 million.
D £100 million.

Thanks much.

 

[Jyoti]

Hi jamaicanjem,
In the qts marginal propensity to save is given i.e. 0.25 hence marginal propensity to consume will be 1-0.25 i.e. 0.75.
Now level of income is given as £200m hence consumption is 0.75*200 i.e. £150m and autonomous expenditure is £15m hence total consumption will be £165m. So the ans. is option B.

All the best!

 

[Anna Walklate]

We have been given:

Y = 200
C = 15 + 0.75Y

So C = 15 + 0.75 x 200 = 165 and the answer is Option B.

We can generally write C as:

C = a + bY

where a is autonomous, ie it does not depend on Y. It represents what consumers spend even if their income is zero. People who do not have an income will still need to spend money on essentials such as food and basic accommodation. b is the marginal propensity to consume.

In the textbook, we are usually given C as a linear function of Y without the autonomous term, however some questions still include this term.