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Consumption of the whole society change

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Reference no: EM132415060

1. Suppose that 70% of the population acts according to the traditional Keynesian consumption theory due to liquidity constraints. The remaining 30% of the population follows the permanent income theory.

A. If the MPC in Keynes's consumption theory is 0.8, and the change of disposable income is 10 million yuan (assuming that the change is completely derived from temporary income), what is the change of consumption?

B. If 70% of the population acts on the life cycle theory and 30% acts on the Keynesian consumption theory, how much will consumption change?

C. If 100% of the population acts according to the life cycle theory? what is the change of consumption?

But when interest rates rise, which people's consumption will rise and which people's will fall? How will the consumption of the whole society change? Is it wrong to ignore the impact of interest rate on consumption in IS-LM model?

Reference no: EM132415060

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