2. Suppose the consumption behaviour in problem 1 changes so that C= 100+ .9Y, while I remains at 50. a) Is the equilibrium level of income higher or lower than it was in problem 1(a)? Calculate the new equilibrium level, Y', to verify this.
Set 1: Equilibrium output
1.
Government. Suppose the consumption function is given by C= 100+ .8Y, while investment is given by I= 50
a) What is the equilibrium level of income in this case?
b) What is the level of saving in equilibrium?
c) If, for some reason, output is at the level of 800, what will the level of involuntary inventory accumulation be?
d) If I rises to 100 (we discuss what determines I in later chapters), what will the effect be on the equilibrium income?
e) What is the value of the multiplier, a, here?
f) Draw a diagram indicating the equilibria in both (a) (d).
2.
Suppose the consumption behaviour in problem 1 changes so that C= 100+ .9Y, while I remains at 50.
a) Is the equilibrium level of income higher or lower than it was in problem 1(a)? Calculate the new equilibrium level, Y', to verify this.
b) New suppose investment increases to I= 100, just as in problem 1(d). What is the new equilibrium income?
c) Does this change in investment spending have more or less of an effect on Y than it did in problem 1? Why?
d) Draw a diagram indicating the change in equilibrium income in this case.
Answer the question no. 2(a)
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