Spring 2010 – Introductory Macroeconomics – Econ 104a,c,d,e,f - Voorheis
Answer Key Worksheet 3– Classical Model, Keynesian Consumption
1.
Consider the following consumption function.
C = 200 + .75(PDI),
Where C is consumption, autonomous spending is 200, the MPC is .75, and PDI is personal
disposable income.
a.
Using the Graph below, graph the Consumption Function.
C
300
200
100
0
= Income
100
800
1200
b. On the Graph, label the point where Savings = 0, as well as the areas of saving and dissaving.
Intersection: Savings = 0, to the right of intersection is the area of saving, left is area of dissaving.
c.
Now, derive the point where Savings = 0 using the formulas.
What is consumption when savings is
zero?
PDI=C+S, S=0
PDI=200+0.75PDI
0.25PDI=200
PDI=800
C=PDI=800 since S=0
d. What happens if autonomous spending increases to 300, so C= 300 + .75(PDI)?
Show on the
graph, and solve for the savings = 0 income below
.
PDI=C+S, S=0
PDI=300+0.75PDI
0.25PDI=300
PDI=1200
C=PDI=1200 since S=0
2.
Consider the following Data:
MPS = .2, Autonomous spending is 100
What is the consumption function?
MPC=1-MPS=0.8
C= 100 +0.8(PDI)
3.
What was the Classical Model Answer to the Great Depression?
From page 339: A capitalist economy works on automatic pilot: if there is more investment than saving, for
example, the interest rate would be bid up, because supply for capital is low and demand is high. With
higher interest rates, fewer people would want to invest, so the equilibrium of savings = investment would