Question:
If the aggregate savings function for an economy is $S = -200 + 0.25Y$, then the aggregate consumption function of this economy is
(1) $C = 200 + 0.75Y$
(2) $C = 200 – 0.25Y$
(3) $C = 200 + 0.25Y$
(4) $C = 200 – 0.75Y$
(5) $C = -200 + 0.75Y$
Correct Answer:
(1)
Answer Explanation:
National Income ($Y$) is either consumed ($C$) or saved ($S$), meaning $Y = C + S$. Therefore, $C = Y – S$. Substituting the saving function: $C = Y – (-200 + 0.25Y) rightarrow C = 200 + Y – 0.25Y rightarrow C = 200 + 0.75Y$.
Topic: Consumption Theory Year: 2020
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