Determine the marginal prosperity to save

Reference no: EM1369760

You are given the following data concerning Freedonia, a legendary country:
(1) Consumption function: C = 200 + .8Y
(2) Investment Function: I = 100
(3) AE is equal to C + I
(4) AE = Y
a. What is the marginal propensity to consume in Freedonia, and what is the marginal prosperity to save? MPC is C/Y, 1 MINUS MPC IS THE MPS.

b. Graph equations (3) and (4) and solve for equilibrium income.

c. Suppose equation (2) were 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 saving function on a graph with equation (2). Explain why the equilibrium income in this graph must be the same as in part b.

Reference no: EM1369760

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