Problem
Suppose that 70 percent of a country's population, as a consequence of liquidity constraints, behaves in accordance with the traditional model of consumption and thus consumes, every period, a given fraction of its disposable income. The other 30 percent of the population behaves in accordance with the LC-PIH.
a. If the MPC in the traditional model is .8 and disposable income changes by $10 million (you may assume that this change is due entirely to a change in transitory income), by how much will consumption change?
b. What if 70 percent of the population behaves in accordance with the LC-PIH, and 30 percent behaves in accordance with the traditional model?
c. What if 100 percent of the population behaves in accordance with the LC-PIH?
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.