Consumption and Saving Functions

Suppose the following table describes the relation of consumption spending to the disposable income

(a) Derive the consumption function. Explain the two components of the consumption function. What is the difference between these two components? Why is this difference important? Draw the graph in the (C – Y_D) space.

(b) What is the level of consumption when the level of income equals to $900? to $300? What is the level of induced consumption in these two cases?

(c) Can consumption exceed disposable income? How is it financed then?

(d) What is the saving function in this economy? What is the value of the marginal propensity to save? Draw the graph in the (S – Y_D) space.

(e) What is the level of saving when the level of income equals to $900, to $350, to $300? Redraw the graphs from points (a) and (d) and show the areas of saving and dissaving.

(f) Suppose income grows from $850 to $950. What happens to the levels of consumption and of saving? What are the average propensity to consume and the average propensity to save? What happens to the average propensity to consume and the average propensity to save with the increase in income? Draw the graphs in the (C – Y_D) and (S – Y_D) spaces and show the changes putting the results of your calculations.

(g) Suppose in the initial situation, described in point (a), autonomous consumption increases by $10. Derive the new consumption and the new saving functions. What would happen:

(i) to the level of autonomous saving;

(ii) to the values of marginal propensity to consume and of the marginal propensity to save;

(iii) to the consumption and saving lines.

What is the new level of the disposable income when saving is zero?

Redraw the graphs from points (a) and (d) and show the changes.

(h) Suppose that in the initial situation, described in point (a), households now save 10 cents from each additional dollar of income. Derive the new consumption and the new saving functions. What would happen:

(i) to the values of autonomous consumption and autonomous saving;

(ii) to the values of the marginal propensity to consume and of the marginal propensity to save;

(iii) to the consumption and saving lines.

What is the new level of the disposable income when saving is zero?

Redraw the graphs from points (a) and (d) and show the changes.

Instruction: All the lines, all the points and all the slopes of the lines on all of your graphs must be signed with the corresponding figures (numbers) from your calculations.

4. Determinants of Investment Demand

What effect on total investment would you predict as a result of the events listed below? In each case define the category of investment that would change (your choices are: equipment purchases by firms, nonresidential construction, residential construction and inventory investment). What happens in each case to

(i) the investment demand curve in the space (investment I – interest rate r);

(ii) the planned investment curve in the space (investment I – output Y);

(iii) the aggregate planned expenditure curve in the space aggregate expenditures AE – output Y)?

Put your answers in the following table

(a) An increase in consumer confidence.

(b) A decline of the manufacturers’ utilization of existing capacity.

(c) An increase in vacancy rates in commercial buildings.

(d) Widespread endorsement of zero population growth by young couples.

(e) A sharp increase in the frequency and duration of strikes in the transportation industries.

(f) Forecasts of very low growth rates of real national income over the next five years.

(g) Tax reform that eliminates deductions for property taxes in computing taxable personal income.

(h) A fall in the interest rates due to monetary expansion undertaken by the Central Bank.

(i) Real estate developers find that there are a larger number of purchasers for newly constructed commercial real estate.

(j) The tightening of existing and future competition.

(k) The rise in the availability of advanced, more efficient technology.

(l) Implementation of tighter credit standards for consumers by commercial banks.

(m) The decline in expected sales.

(n) Firms begin to reinvest part of their profits.

(o) Investment demand becomes more sensitive to the interest rate.

Date: 2015-12-24; view: 1376