1. Section 9-2 analyses the consumption function, and Box 9-1 shows that the consumption function holds in practice for the United States. In this exercise you will derive a consumption function for Australia.

a. Go to the Penn World Tables ( http://pwt.econ.upenn.edu ). Click on “Penn World Table”

and then “Data Download.” Download Australian data for:

• Real Gross Domestic Income (RGDPL adjusted for Terms of Trade changes).

• Consumption Share of Real GDP per capita (RGDPL) and Real GDP per capita

(Constant Prices: Chain series). (Note: To get total consumption per capita, you will need to multiply consumption share of real GDP by real GDP.)

b. Create a scatterplot that has Real Gross Domestic Income per capita on the X axis and Total Consumption per capita on the Y axis. What is the relationship between consumption and income in Australia? Visually, on average by how much would an increase of AU$10 billion in income affect consumption? Using your answer, compute the marginal propensity to consume for Australia.

*c. If you have taken a statistics class, use EXCEL or a statistical program in order to run the following regression:

C  −

C  cY