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6. Assume investment = 100, government expenditure = 75 and net taxes fixed at 100. There...

6. Assume investment = 100, government expenditure = 75 and net taxes fixed at 100. There was an autonomous fall in consumption and an increase in saving causes consumption function to shift from C= 25+ 0.8YD to C= 5 +0.8YD

a. Find the new equilibrium income.

b. Analyse the impact on equilibrium real GDP due to the shift in consumption function utilising appropriate Keynesian diagram.

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6. Assume investment = 100, government expenditure = 75 and net taxes fixed at 100. There was an autonomous fall in consumption and an increase in saving causes consumption function to shift from C= 25+ 0.8YD to C= 5 +0.8YD

a. Find the new equilibrium income.

Use C + I + G = Y

5 + 0.8*(Y - 100) + 100 + 75 = Y

180 + 0.8Y - 80 = Y

100 = 0.2Y

Y = 500.

This is the equilibrium income after change,

b. Analyse the impact on equilibrium real GDP due to the shift in consumption function utilising appropriate Keynesian diagram.

Consumption function shifts from C= 25+ 0.8YD to C= 5 +0.8YD and so equilibrium GDP falls from 600 to 500.

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