4.5 You are given the following data concerning Freedonia, a legendary country: (1) Consumption function: C = 200 + 0.8Y (2) Investment function: I = 100 (3) AE = C + I (4) AE = Y %3D a. What is the marginal propensity to consume in Free- donia, and what is the marginal propensity to save? b. Graph equations (3) and (4) and solve for equilib- rium 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 invest- ment change equilibrium income? What is the value of the multiplier? d. Calculate the saving function for Freedonia. Plot this saving function on a graph with equation (2). Explain why the equilibrium income in this graph must be the same as in part b. %3D

4.5 You are given the following data concerning Freedonia, a legendary country: (1) Consumption function: C = 200 + 0.8Y (2) Investment function: I = 100 (3) AE = C + I (4) AE = Y %3D a. What is the marginal propensity to consume in Free- donia, and what is the marginal propensity to save? b. Graph equations (3) and (4) and solve for equilib- rium 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 invest- ment change equilibrium income? What is the value of the multiplier? d. Calculate the saving function for Freedonia. Plot this saving function on a graph with equation (2). Explain why the equilibrium income in this graph must be the same as in part b. %3D

Essentials of Economics (MindTap Course List)

8th Edition

ISBN:9781337091992

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter18: Savings,investment And The Financial System

Section: Chapter Questions

Problem 5PA

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