Economics
CSU Consumption Function & Consumption Spending in A Straight Line Discussion

Columbia Southern University

Question Description

I’m studying for my Economics class and need an explanation.

Sheet with the questions have been attached, as well as a guide. There is 6 questions total, some may contain multiple parts within the same question. One of the questions will be in bold. It is 10-2, Question 3. That one has a graph which has been attached to this document as well.

All sources used, including the textbook, must be referenced; paraphrased and quoted material must have accompanying citations. All references and citations used must be in APA style.

Unformatted Attachment Preview

UNIT V STUDY GUIDE Aggregate Expenditure and Aggregate Demand Course Learning Outcomes for Unit V Upon completion of this unit, students should be able to: 5. Construct the aggregate expenditure and demand model of the macro economy. Reading Assignment Chapter 9: Aggregate Expenditure and Aggregate Demand Chapter 10: Aggregate Supply Unit Lesson Savings Rates in China: Why the Big Difference, and What are the Implications? In our lesson for Unit V, we study aggregate demand. Have you considered the rate of savings for various countries and the possible implications? After 20 years of going down, the personal saving rate in the United States has increased from the start of the latest “recession,” and one needs to consider what may happen during the recovery. The “Empirical Analysis of the Saving Rate in the United States” is quoted below: The U.S. saving rate has historically been much lower relative to the saving rate of Japan and the 12 nations that make the Euro-zone. For example, between 2000 and 2004 the Euro-zone countries saved 10.5% of their disposable income while Japanese saved 6% of theirs. The saving rate for the U.S. over the same period was only 3.2%. In fact, it was consumers who carried the U.S. economy out of recession in the 80s and 90s and for over two decades United States was known to be a nation of "shop until you drop." Since the early 1980s U.S. personal saving rate declined steadily from a high of 10.9 percent in 1982 to a low rate of 1.4 percent in 2005. This downward trend represented a dramatic change in the behavior of personal saving rate because during the preceding three decades, the personal saving rate had experienced an upward trend. While in the 1950s the average personal saving rate was 7.94 percent, the 1960s and 1970s had witnessed the average personal rates climb to 8.29 and 9.59 percent, respectively. More recently, however, and especially around the onset of the 2007 recession, dubbed the "Great Recession," personal saving rate seems to have staged a turnaround. It climbed systematically, registering at 2.1, 4.1, 5.9, and 5.7 percent for 2007, 2008, 2009, and 2010 respectively. (Amavati, Adilov, & Dilts, 2013, para. 3) What is even more curious is to examine the savings rate in China over the same time. How might someone explain that the Chinese have had the highest savings rate? These savings rates have attracted much research to explain the possible implications. China has achieved savings in recent years of 50% and before that averaged 40% (Eckaus, 2014). Might you be astounded? Why might the Chinese consumers be saving, while the U.S. consumer is credited for spending its, and much of the world’s, way out of a recession? Often the U.S. is criticized for saving too little collectively, while the Chinese are criticized for spending too little. As one examines aggregate spending, which is opposite of aggregate savings, this means that Chinese consumers have a declining rate of consumption. This is contrary to the stated Chinese government’s wish, as stated by economists and the government, to increase consumption. There is the argument that there is a “forced” savings system in China, as noted by government programs that reward investment by taxation policy and economic structures, such as lending rates that encourage investment and not consumer spending. In China, government retirement programs are set up to reward contribution, and this an indirect savings tool. Another way that savings are encouraged is by the non- BBA 2401, Principles of Macroeconomics 1 distribution of corporate profits. Profits are being reinvested and not returned to shareholders. The policy of UNIT x STUDY GUIDE the banking system is to encourage loans for reinvestment and not loans to individuals. Title Which is better, the low savings rate and high consumption of the U.S., or the low consumption and high savings rate of China? As budding economists, we will let you decide. The key is to become informed and note the various trade-offs that are necessary. Government, with the advice of economists, must decide economic policy that creates the most good for everyone. After leaving this course, be aware of these tradeoffs as you work and as you participate as a voter. References Amavati, H., Adilov, N., & Dilts, D. A. (2013). Empirical analysis of the saving rate in the United States. Journal of Management Policy and Practice, 14(2), 46-53. Retrieved from http://www.nabusinesspress.com/JMPP/SamavatiH_Web14_2_.pdf Eckaus, R. S. (2014). Forced saving in china. The China Quarterly, 217, 180-194. doi:http://dx.doi.org/10.1017/S0305741013001446 Suggested Reading Click here for the Chapter 9 Presentation in PowerPoint form. Click here to access a PDF version of the presentation. Click here for the Chapter 10 Presentation in PowerPoint form. Click here to access a PDF version of the presentation. Learning Activities (Nongraded) Nongraded Learning Activities are provided to aid students in their course of study. You do not have to submit them. If you have questions, contact your instructor for further guidance and information. Review the online tutorial below [link to MyCourseTools tutorial of same name], which focuses on specific topics in Unit V. Aggregate Demand https://media.pearsoncmg.com/pcp/pls/pls_mycoursetools/fufillment/mct_1256689785_csu/prin_macro/redire ct_01_pm_l10_t02.html BBA 2401, Principles of Macroeconomics 2 9-1 1. (Consumption) Use the following data to answer the questions below: Consumption Real Expenditures Saving Disposable Income (Billions) (Billions) (Billions) $100 $150 $____________ $200 $200 $____________ $300 $250 $____________ $400 $300 $____________ (A). Graph the consumption function, with consumption spending on the vertical axis and disposable income on the horizontal axis. (B). If the consumption function is a straight line, what is its slope? (C). Fill in the saving column at each level of income. If the saving function is a straight line, what is its slope? 9-2 4. (Consumption Function) How would an increase in each of the following affect the consumption function? (A). Net Taxes (B). The Interest Rate (C). Consumer Optimism, or Confidence (D). The Price Level (E). Consumer’s Net Worth (F). Disposable Income 9-5. 9. (Simple Spending Multiplier) For each of the following values for the MPC, determine the size of the simple spending multiplier and the total change in real GPD demanded following a $10 billion decrease in spending: (A). MPC = 0.9 (B). MPC = 0.75 (C). MPC = 0.6 10-2 3. (Expansionary and Recessionary Gaps) Answer questions A through F on the basis of the following graph: (A). If the actual price level exceeds the expected price level reflected in long-term contracts, real GDP equals ______ and the actual price level equals _____ in the short run. (B). The situation described in part (A) results in a(n) _____ gap equal to ______. (C). If the actual price level is lower than the expected price level reflected in longterm contracts, real GDP equals _____ and the actual price level equals _____ in the short run. (D). The situation described in part (C) results in a(n) _____ gap equal to _____. (E). If the actual price level equals the expected price level reflected in long-term contracts, real GDP equals _____ and the actual price level equals ______ in the short run. (F). The situation described in part (E) results in a(n) _____ gap equal to _____. 10-3 5. (Changes in Aggregate Supply) List three factors that can change the economy’s potential output. What is the impact of shifts of the aggregate demand curve on potential output? Illustrate your answers with a diagram. 10-3 6. (Supply Shocks) Give an example of an adverse supply shock and illustrate graphically. Now do the same for a beneficial supply shock. ...
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Final Answer

Attached.

9-1
1. (Consumption) Use the following data to answer the questions below:
Consumption Real
Disposable Income (Billions)
$100
$200
$300
$400

Expenditures
(Billions)
$150
$200
$250
$300

Saving
(Billions)
$____________
$____________
$____________
$____________

(A). Graph the consumption function, with consumption spending on the vertical axis and
disposable income on the horizontal axis.

Consumptioon
Expenditure(billions)

Consumption Function
400
300
200
100
0
0

100

200

300

400

500

Real Disposable Income(billions)

(B). If the consumption function is a straight line, what is its slope?
Using two point formula,
Slope of consumption function = (200-150)/ (200-100) =1/2
(C). Fill in the saving column at each level of income. If the saving function is a straight line,
what is its slope?

Saving(billions)

Savings Function
200
100

0
-100

0

100

200

300

Real Disposable ...

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UC Berkeley

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