Based on the consumption function C = $200 billion + .8Yd, if disposable income increases by $200 billion, planned consumption?the answer is 160 billion. but hwy do i only times .8 by 200 billion?...

Based on the consumption function C = $200 billion + .8Yd, if disposable income increases by $200 billion, planned consumption?

the answer is 160 billion. but hwy do i only times .8 by 200 billion? and not just times it get 160 billion and then do 160 times 200 billion and then i will get the answer.why is this way wrong?

Expert Answers
pohnpei397 eNotes educator| Certified Educator

I hope that the question is asking you what happens to planned consumption.  Because the answer to that would be that planned consumption goes up by $160 billion.

The reason for that is that Yd is the disposable income and .8 is the marginal propensity to consume.  That means that every time people get an extra $100, they will spend $80 of it (and save the other $20).  So to figure out what happens when people get $200 billion extra, you just multiply $200 billion by .8 and that's where you get your answer -- if they get $200 billion more, they will spend $160 billion of it.

neela | Student

C = 200+0.8Yd or an equation like y = mx+c are similar. Here m=0.8 is the slope of the equation. c is the y intercept in y =mx+c. Therefore, Cost C in C = 100+0.8Yd has the 0.8 rate of increase or a 0.8 slope  over any disposable income. That means the straight line graph of C = 200+0.8Yd from left to right makes an angle of approximately 38.66 degree with Yd represented by X axis. The rate of increase in cost is always 0.8 times a unit of disposable income . So it should be 0.8times 200 billions = 160 billion when Yd is 200 billion.