1. Suppose that initially equilibrium was 200 units and that this was also full employment level of income. Assume the consumption is C = 25 + 0.8YD, and that, from this level, we now have a decline in investment of 8 units. What will be the new level of income? What increase in government spending would be needed to restore income to its initial equilibrium level of 200 units?

2. In the above question, assume that, begining from the initial equilibrium position investment equals 100, government expenditures equals 75, and net taxes are fixed at 100, there is an autonomous decline in consumption and an increase in savings such that the new consumption function is C = 5 + 0.8YD.
a) Find the change in income resulting from this autonomous increase in savings. Explain why this change occured.
b) Calculate the level of savings before and after the shift in consumption and, therefore, the savings function. How do you explain this result?

Solution Summary

Calculate the level of savings before and after the shift in consumption and, therefore, the savings function. How do you explain this result?

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