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Suppose that the aggregate level of spending on consumer goods in an economy can be represented by the
following equation:
C = a + b* (Y-T) = 100 + 0.7*(Y-T)
where 0.7 is the marginal propensity to consume (i.e. how much of each new dollar of income is spent on consumer goods) or “b”, Y is national income (or GDP) and T is the tax burden on consumers.
a). Suppose that disposable income (i.e. income minus taxes) equals $200 billion. What is the aggregate level of consumption for this economy? Provide a specific number.
b). Use this equation to illustrate the relationship between consumption and income. Be sure to label the graph carefully, noting the vertical intercept and the slope.
Sagot :
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