The consumption function, first developed by John Maynard Keynes, captures one of the key relationships in economics. It expresses consumption as a function of disposable income, where disposable income is income after taxes. The accompanying table shows a portion of quarterly data for average U.S. annual consumption (Consumption in $) and disposable income (Income in $) for the years 2000–2016.

a. Find the sample regression equation for the model: Consumption = β₀ + β₁ Income + ɛ. 

b. In this model, the slope coefficient is called the marginal propensity to consume. Interpret its meaning. 

c. What is predicted consumption if disposable income is $35,000?

Transcribed Image Text:

Date Q1, 2000 Q2, 2000 ⠀ Q4, 2016 Consumption 28634 28837 ⠀ 35987 Income 31192 31438 ⠀ 39254