In: Economics
ans
a) C = 200 + 0.9Y
200 is autonomous consumption C1
0.9 is MPC, marginal propensity to consume,c
marginal propensity to save, s=MPS= 1- MPC= 1-0.9=0.1
saving function is given by
S= -C1 + s(Y) = -200 + 0.1Y
S= -200 + 0.1Y
0.9 is MPC, marginal propensity to consume,c
marginal propensity to save, s=MPS= 1- MPC= 1-0.9=0.1
b) planned aggregate expenditure
AE =C+I
I is investment
AE= 200 + 0.9Y +300
AE= 500+ 0.9Y
ans c)
equilibriumis determined where
Y= AE
Y= 500+ 0.9Y
0.1Y= 500
Y= 5000 is equilibrium level of income
C = 200 + 0.9Y
at equilibrium
C= 200+ 0.9*5000 = 4700
S= -200 + 0.1Y
at equilibrium
S= -200 + 0.1*5000 = 300
d)
according saving investment approach, at equilibrium
S= I
-200 + 0.1Y = 300
0.1Y= 500
Y= 500/0.1
Y=5000 is equilibriumm acc to saving - investment approach
e)
multiplier= 1/ mps = 1/(1-mpc)
multiplier= 1/0.1 =10
which means if investment increases by 1, income will increase by 10, that's why multiplier is 10
f) if income is 4000
AE = 500+ 0.9Y
=500 + 0.9*4000 = 4100
so here AE> Y
here unplanned inventories will fall by 100 ( diiference between AE- Y) because demand is more than supply
g) if investment increases by 25%, which means investment will increase by 25% of 300 = 75
so according to multipler