Question: In the Keynesian consumption function: Ct = a + Yd t the estimated marginal propensity to consume is , and the average propensity to consume

In the Keynesian consumption function:

Ct = a + δYd t

the estimated marginal propensity to consume is δˆ, and the average propensity to consume is C/Yd = aˆ/Yd + δˆ. Using data on annual income and consumption (both of which were measured in £ sterling) from 200 UK households we found the following regression equation:

Ct = 138.52 + 0.725Yd t R2 = 0.862

(a) Provide an interpretation of the constant in this equation and discuss its sign and magnitude.

(b) Calculate the predicted consumption of a hypothetical household with an annual income of £40,000.

(c) With Yd t on the x-axis, draw a graph of the estimated Marginal Propensity to Consumption (MPC) and Autonomous Consumption Path (ACP).

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