a.Explain Keynesian theory of consumption with its important features.
b.Suppose,the saving of an economy is given by S=-10+0.2Y and autonomous investment I=$500million.
Find:
1.the equilibrium level of income;
2.the level of consumption;
3.the new levels of income and consumption if investment increases permanently by $500 million.
1
Expert's answer
2015-01-13T11:24:28-0500
A. Keynesian theory of consumption is called the theory of absolute income. It is based on the following assumptions: 1. The level of consumption depends only on the magnitude of current disposable income: C = C (Yd), and this relationship is positive, i.e., with an increase in disposable income consumption increases, but 2. In the economy a psychological law acts according to which "people tend to increase their consumption with income growth, but to a lesser extent than income increases." This is due to the fact that because disposable income is divided into consumption and savings: Yd = C + S, 3. then the growth of disposable income both consumption and savings increase. B. The main formula is: Y = C + I. Knowing the formula of consumption, it is possible to derive a formula on savings: S = Y- C. Thus, S = I. The equilibrium level of income is: -10+0.2Y = 500 000. Y = $2.5 billion The level of consumption is: C = 2500 - 500 = $2 billion. The new level of income due to investment increase is: Y = $5 billion. The new level of consumption due to investment increase is: C = $4 billion.
Numbers and figures are an essential part of our world, necessary for almost everything we do every day. As important…
APPROVED BY CLIENTS
"assignmentexpert.com" is professional group of people in Math subjects! They did assignments in very high level of mathematical modelling in the best quality. Thanks a lot
Comments
Leave a comment