You are given the following data concerning Freedonia, a leg- endary country: (1) Consumption function: C = 200 + 0.8Y (2) Investment function: I = 100 (3) AE C + I (4) AE = Y a. What is the marginal propensity to consume in Freedonia, and what is the marginal propensity to save? b. Graph equations (3) and (4) and solve for equilibrium income.
You are given the following data concerning Freedonia, a leg-
endary country:
(1) Consumption function: C = 200 + 0.8Y
(2) Investment function: I = 100
(3) AE C + I
(4) AE = Y
a. What is the marginal propensity to consume in Freedonia,
and what is the marginal propensity to save?
b. Graph equations (3) and (4) and solve for equilibrium income.
c. Suppose equation (2) is changed to (2 ́) I = 110. What is the
new equilibrium level of income? By how much does the
$10 increase in planned investment change equilibrium
income? What is the value of the multiplier?
d. Calculate the saving function for Freedonia. Plot this sav-
ing function on a graph with equation (2). Explain why the
equilibrium income in this graph must be the same as in
part b.
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