Explain why individuals may try smooth their consumption over their lifeti Illustrate this concept with a diagram. Explain how borrowing constraints can impede the process of consumption smoothing. If many households are affected by such constraints, explain ho result in a "Kevnesian" consumption function

Explain why individuals may try smooth their consumption over their lifeti Illustrate this concept with a diagram. Explain how borrowing constraints can impede the process of consumption smoothing. If many households are affected by such constraints, explain ho result in a "Kevnesian" consumption function

Macroeconomics: Principles and Policy (MindTap Course List)

13th Edition

ISBN:9781305280601

Author:William J. Baumol, Alan S. Blinder

Publisher:William J. Baumol, Alan S. Blinder

Chapter8: Aggregate Demand And The Powerful Consumer

Section: Chapter Questions

Problem 8DQ

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c. What is meant by "autonomous consumption"? d. Explain the consumption puzzle? e. How does the Life-Cycle Hypothesis resolve the puzzle?
b. From the Intertemporal Choice Model, many theories (non-Keynesian theories ofConsumption) came into being. Using graphical and mathematical expressions, compareand contrast the following theories on consumption behaviours:i. Franco Modigliani: Life-Cycle Hypothesisii. Milton Friedman: Permanent-Income Hypothesisiii. Robert Hall: Random Walk Hypothesis
Suppose that one day your rich aunt unexpectedly gives you $10,000 to use as you like, no strings attached. A fraction of that gift will be consumed (the marginal propensity to consume, MPC) or saved (the marginal propensity to save, MPS). If you are like the "average American," you will save less than 5% of your $10,0002. The money you don't save is consumed and is spent on purchasing goods and services. So, whether you spend the increased income on food, entertainment, paying off loans, or a new bicycle, that money goes back into the economy, where it generates revenue through taxes, and gets spent again. This is because an injection of extra income leads to more spending, which creates more income, and so on. In this way, your money is actually spent many times and it has the effect of stimulating the economy through what is known as the multiplier effect. Gifts from rich aunts are not the only way to stimulate the economy. Governments occasionally provide an economic stimulus by…
please explain each question. 1. We assumeconstantMPC in our model. Is this assumption true in the real world? 2. What determines the proportion of bonds/money that the household keeps? 3. What effect an increase of government spending will have on the output equilibrium in the goods market? Explain using autonomous spending.
10. Consider a one-period economy which experiences the destruction of some of the nation's capital stock (say through a hurricane is de- stroyed). How should this effect equilibrium, consumption, output and labor supply? Now, let's say the government tries to offset some of the declines in capital on output and hours worked by increasing govern- ment spending. What is the likely outcome of this policy intervention in terms of consumption?
1. What is meant by "autonomous consumption"? 2. Explain the consumption puzzle?
Question 8 Which of the following is correct as an interpretation of the Keynesian consumption function? None of the others is correct O The Keynesian consumption function implies that your consumption depends on your overall wealth, rather than your current income. O The Keynesian consumption function states that as income increases consumption increases more than proportionately. The Keynesian consumption function is consistent with the observation that consumption can increase even if disposable income remains the same. The Keynesian consumption function predicts that if your current income is less than your expected future income, you should borrow today to finance your current consumption needs.
B.2 a) Explain why individuals may try to smooth their consumption over their lifetime. Illustrate this concept with a diagram. b) Explain how borrowing constraints can impede the process of consumption smoothing. If many households are affected by such constraints, explain how this may result in a "Keynesian" consumption function. c) In a closed economy Keynesian Cross framework show how a decline in investment will lead to a fall in income. Explain the role of the consumption function and the multiplier in this process.
1. Interpret what it means if MPC equals 0.95? 2. If your MPC is 0.9 and your income falls by $200, what will be your change in spending? 3. For each of the following determine whether there is movement along a consumption schedule (function), or a shift of the schedule. If there is a shift then indicate the direction of the shift and interpret that shift. a. Consumer’s expectations became more optimistic. b. An increase in the interest rate. c. There is a current low level of consumer durables on hand. d. Consumer incomes rise.
b. Consider the following Keynesian Model: C= 50 + 0.4Yd T= 40 I=0.2Y X= 16 G= 30 M= 20 a. Using the equilibrium condition, solve for the value of the equilibrium output. b. What is the value of consumption? c. Write the savings function and use it to calculate the value of savings. d. What is the value of the multiplier? e. Is there a trade deficit or surplus? Give reasons for your answer.
Ts assume that in the model of national economy household consumption is C = 300 + 0.9*DI, companies' gross vestment is Ig = 200, but government expenses are G = 250, while the sum of taxes collected by the government iS -150. Taking into account that disposable income DI =Y-T, calculate: a) Equilibrium level of income Y; b) Calculate the value of Marginal propensity to consume and value of Marginal propensity to save; c) Private consumption at macroeconomic equilibrium%3; d) Develop equation of saving and calculate amount of saving at the point of equilibrium level of income.
Which of the following sets of variable changes will all cause the IS Curve to shift to the right? A. A decrease in autonomous consumption, a decrease in government spending and an increase in financial friction. B. An increase in autonomous consumption, an increase in government spending and a decrease in financial friction. OC. An increase in autonomous consumption, a decrease in government spending and an increase in financial friction. D. A decrease in autonomous consumption, an increase in government spending and an increase in financial friction.