# discussionsectionhandout9answersfall2007 - Econ 102 Fall...

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Econ 102: Fall 2007 Discussion Section Handout #9 Answer Key 1. Consumption Functions We are given the following equations from the Keynesian Model, find the autonomous consumption level, marginal propensity to consume (MPC) and marginal propensity to save (MPS). Find the savings function with respect to disposable income, and then use the given information about net taxes to find the consumption and savings function with respect to real output. If the consumption function with respect to disposable income is not given, find that first! Note : Remember when we have the consumption function in the form C = a + b (Y – T) that autonomous consumption is a and the marginal propensity to consume is b . To solve for the consumption and savings functions with respect to real output rather than disposable income we need to enter the value of net taxes. The savings function with respect to disposable income is S = - a + (1 – b ) (Y – T) (a) C = 125 + 0.75(Y-T) Net Taxes = 100 Autonomous Consumption Level : a = 125 M P C : b = 0.75 M P S : MPS = 1-MPC = 0.25 Savings Function w/ respect to DI : S = - a + MPS(Y – T) = -125 + 0.25(Y – T) Consumption Function w/ respect to Y : C = 125 + 0.75(Y – 100) = 50 + 0.75Y Savings Function w/ respect to Y : S = -125 + 0.25(Y – 100) = -150 + 0.25Y (b) C = 0.80(300-T+Y) Net Taxes = 50 = 240 – 0.8(T – Y) = 240 + 0.8(Y – T) Autonomous Consumption Level : a = 240 M P C : b = 0.8 M P S : MPS = 1-MPC = 0.2 Savings Function w/ respect to DI

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