Question

Question: Assume that I = 100, G = 75 and T = 100. There was a fall in autonomous level of consumption because of which the consumption function changed from C = 20 + 0.6YD to C’ = 10 + 0.6YD

a).Write the aggregate demand equation using C. In that aggregate demand equation, identify the part(s) that is (are) autonomous and the part(s) that is (are) induced expenditure.

b). Write the two savings functions (in terms of YD) associated with C and C’. Identify the MPS and the autonomous part of savings in each case. Interpret the meaning of MPS in each case.

c). If you go from C to C’, by how much will the equilibrium income change in the third round of adjustment? Show your work.

d). By how much will it change eventually using the multiplier?

e). Calculate the equilibrium level of incomes associated with C and C’? Show your work. Does this change match up to what you calculated using the multiplier?

f). Calculate the equilibrium level of incomes associated with C and C’? But, this time use S + T = I + G condition. Show your work. Do you obtain the same conclusions as you did in part (e)?

g). What was C and what was S at the two equilibrium income levels?

h). Suppose the income associated with C was the full employment level of output and now you are at an output level associated with C’. By how much should G change to reach the full employment level? By how much should T change to reach the full employment level?

i). If the government wants to balance the budget and at the same time reach the full employment level of output, what should it do?

Answer 1