Question

Suppose aggregate consumer spending equals $5,000 when aggregate disposable income is zero. Furthermore, suppose that when disposable income increases from $300 to $400, consumer spending increases by $70, and that this relationship between a change in disposable income and its effect on consumer spending is predictable and constant. If aggregate disposable income equals $2,000, then which is the value of aggregate consumer spending? A) $5,140 B) $6,400 C) $7,000 D) $19,000

Answer 1

Answer:

B) $6,400

Explanation:

The equation for the aggregate consumption spending function:

• C = $5,000 + [$70 / ($400 - $300)] YD = $5,000 + ($70 / $100) YD = $5,000 + 0.7 YD

If YD = $2,000

total value of aggregate consumer spending = $5,000 + (0.7 x $2,000) = $5,000 + $1,400 = $6,400