Suppose in the United States consumption is described by the

Suppose in the United States consumption is described by the formula: C= $50 billion+0.9 Yd, where Yd is disposable income. If taxes are $100 billion and household income is $1,000 billion, what is the amount of household savings in the economy?

A. $50 billion

B. $950 billion

C. $900 billion

D. $40 billion

E. $860 billion

Solution

disposable income (Yd) = household income - taxes = $1,000 billion minus $100 billion = $900 billion

C(consumption) = $50 billion+0.9 Yd = $50 billion+0.9*900 billion = $860 billion

Savings = household income - taxes - consumption = $1,000 billion - $100 billion - $860 billion = $40 billion

D. $40 billion