Question

The consumption and saving functions in the Keynesian model Suppose we observe that a person's disposable income (DI) is 50,000 in 2019 and 63,000 in 2020. Suppose we observe that this person's consumption (C) is 47,000 in 2019 and 58,700 in 2020. Assume that this person's consumption obeys the Keynesian consumption function, So that C = A + MPC * DI. Finally, assume that A and MPC are unchanged between 2019 and 2020. (a) Calculate the values of A and MPC for this consumer; and graph the consumption function: (Hint: subtract the C function in 2019 from the C function of 2020). (b) In general, saving is given by the formula S = DI - C. Calculate this person's saving in 2019 and 2020. Assuming that this person's wealth (net worth) on January 1, 2019 was 80,000, what is their wealth on January 1, 2020 and on January 1, 2021? (c) In general, if consumption is given by the function C = A + MPC * DI; then saving will obey the saving function S = -A + (1 - MPC) * DI. Plot the saving function graphically for the consumer in this problem (using the values you found in part (a)): What is this consumer's marginal propensity to save? (d) Calculate the level of disposable income such that saving is exactly zero for this person. If disposable income is less than this level, what happens to saving? Explain how a person can have 'negative saving'; and give two examples of how a person can finance negative saving. (e) Suppose that this person earns 70,000 in 2021. What will their saving be in 2021? (f) Which of the following combinations of asset transactions could be consistent with the level of saving that you found for this person in 2021? More than one answer can be correct; answer either 'yes' or "no" for each of the following combinations and explain your answer in terms of the increase in net worth implied by these transactions. F1: Buy 1000 worth of stocks, sell 4000 worth of jewelry F2: Buy house worth 200,000; take out a 195,000 mortgage loan F3: Repay 10,000 student loan; put 5000 in bank account F4: Repay a 7,000 personal loan, sell 2000 worth of stocks

          The consumption and saving functions in the Keynesian model
Suppose we observe that a person's disposable income (DI) is 50,000 in 2019 and 63,000 in 2020. Suppose we observe that this person's consumption (C) is 47,000 in 2019 and 58,700 in 2020. Assume that this person's consumption obeys the Keynesian consumption function, So that C = A + MPC * DI. Finally, assume that A and MPC are unchanged between 2019 and 2020.
(a) Calculate the values of A and MPC for this consumer; and graph the consumption function: (Hint: subtract the C function in 2019 from the C function of 2020).
(b) In general, saving is given by the formula S = DI - C. Calculate this person's saving in 2019 and 2020. Assuming that this person's wealth (net worth) on January 1, 2019 was 80,000, what is their wealth on January 1, 2020 and on January 1, 2021?
(c) In general, if consumption is given by the function C = A + MPC * DI; then saving will obey the saving function S = -A + (1 - MPC) * DI. Plot the saving function graphically for the consumer in this problem (using the values you found in part (a)): What is this consumer's marginal propensity to save?
(d) Calculate the level of disposable income such that saving is exactly zero for this person. If disposable income is less than this level, what happens to saving? Explain how a person can have 'negative saving'; and give two examples of how a person can finance negative saving.
(e) Suppose that this person earns 70,000 in 2021. What will their saving be in 2021?
(f) Which of the following combinations of asset transactions could be consistent with the level of saving that you found for this person in 2021? More than one answer can be correct; answer either 'yes' or "no" for each of the following combinations and explain your answer in terms of the increase in net worth implied by these transactions.
F1: Buy 1000 worth of stocks, sell 4000 worth of jewelry
F2: Buy house worth 200,000; take out a 195,000 mortgage loan
F3: Repay 10,000 student loan; put 5000 in bank account
F4: Repay a 7,000 personal loan, sell 2000 worth of stocks

Added by Shannon H.

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