# Consumption Function and Equilibrium National Income.

**Topics:**Consumption function, Keynesian economics, Macroeconomics

**Pages:**2 (256 words)

**Published:**January 23, 2014

1. Given

C = 40 + 0.5Yd

I = 60

T = 10 + 0.2Y

X = 20

a) Find out the value of equilibrium national income.

b) Check if there is a budget deficit or surplus.

c) And what about the trade balance?

d) What happens if Imports increase of 20?

G = 55

M = 10

2. Given C = 40 + 0.5(Y-T)

I = 60

G = 55

T = 10 + 0.2Y

What is the value of equilibrium income level ?

If both autonomous consumption (expenses) and T increase by the same amount, equilibrium Y will increase, decrease or being unchanged? Why? 3. In a closed economy with C, autonomous I and G, suppose consumers of this economy are of 2 groups, half of them having C1 = 0.8 Y1 and the other half having C2 = 0.9 Y2. Find the aggregate consumption function if each group earns half of the aggregate income. Show your steps.

QUESTIONS for REVISION

1. Why is the simple Keynesian model said to be "demand driven"? 2. Contrast the components of aggregate demand in a closed economy without Government to those of an open economy with Government.

3. What is a "behavioural" relationship?

4. In the Keynesian cross model, how do savings and investment come into equilibrium? 5. Why might the consumption function used in the Keynesian cross model be described as "too simplistic"?

5. In an open economy model with Government, what are the main "leakages" out of the circular flow of National Income?

6. Write the expression for the simple investment multiplier (closed economy without Government activity); now write that for the full multiplier (in an open economy with Government). 7. Can resources be underutilised in the Keynesian cross model? If so, explain why.

MULTIPLE CHOICES

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