How much will consumption change

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Reference no: EM131136400

Suppose that 70 percent of a country's population, as a consequence of liquidity constraints, behaves in accordance with the traditional model of consumption and thus consumes, every period, a given fraction of its disposable income. The other 30 percent of the population behaves in accordance with the LC-PIH.

a. If the MPC in the traditional model is .8 and disposable income changes by $10 million (you may assume that this change is due entirely to a change in transitory income), by how much will consumption change?

b. What if 70 percent of the population behaves in accordance with the LC-PIH, and 30 percent behaves in accordance with the traditional model?

c. What if 100 percent of the population behaves in accordance with the LC-PIH?

Reference no: EM131136400

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