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Consider an economy with the following characteristics:
i. The price-level is fixed
ii. The economy is closed (Exports - Imports = 0)
iii. Government spending (G) and Investment (I) are both constant
iv. Income (Y) and Savings (S) are both a function of Disposable Income (Yd)
v. Autonoumous savings are equal to -$40 billion
vi. Savings are equal to $80 billion when disposable income is $600 billion
a) What is the value of the marginal propensity to consume out of disposable income? Use this value to determine how much consumption would increase if transfer payments increased by $10 billion.
b) What is the value of the marginal propensity to consume out of income if the tax rate is equal to 0.3? Use this value to find the slope of the aggregate expenditure curve and the value of the simple (Keynesian) expenditure multiplier.
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