The diagram below shows desired aggregate expenditure for a hypothetical economy. Assume the following features of this economy:
· marginal propensity to consume mpc) = 0.75
· net tax rate t) = 0.20
· no foreign trade
· fixed price level
· all expenditure and income figures are in billions of dollars.
FIGURE 22-2
-Refer to Figure 22-2. Which of the following correctly describes the consumption function for this economy?
A) C = 0.6)YD
B) Y = 250 + 0.75)YD
C) C = 75 + 0.75)YD
D) Y = 250 + 0.75)Y
E) C = 250 + 0.6)Y

Question

The diagram below shows desired aggregate expenditure for a hypothetical economy. Assume the following features of this economy:
· marginal propensity to consume mpc) = 0.75
· net tax rate t) = 0.20
· no foreign trade
· fixed price level
· all expenditure and income figures are in billions of dollars.
  FIGURE 22-2
-Refer to Figure 22-2. Which of the following correctly describes the consumption function for this economy?
A) C = 0.6)YD 
B) Y = 250 + 0.75)YD 
C) C = 75 + 0.75)YD 
D) Y = 250 + 0.75)Y 
E) C = 250 + 0.6)Y

Quizplus · Accepted Answer

The consumption function for this economy can be found by multiplying the marginal propensity to consume (mpc) by disposable income (YD) and adding autonomous consumption (a). In this case, the mpc is 0.75 and there is no autonomous consumption (since it is not given in the diagram). Therefore, the consumption function is C = 0.75YD. Adding the autonomous consumption term of 75 billion dollars gives the final function: C = 75 + 0.75YD.

The Diagram Below Shows Desired Aggregate Expenditure for a Hypothetical