Question 1

You are given the following data concerning Freedonia:

(i) consumption function: C=200+0.8Y

(ii) investment function: I=100
(iii) AE=C+I
(iv) AE=Y

a. What is the marginal propensity to consume in Freedonia, and what is the marginal
propensity to save?
b. Graph equations (iii) and (iv).
c. Find the equilibrium level of output.
d. Suppose equation (ii) is changed to I=110. What is the new equilibrium level of income?
e. What is the level of the multiplier?

Question 2

You are given the following data concerning Passionomia:

C = 200 + 0.8𝑌𝑑 , I = 100, T = 100 + 0.1Y, G = 150, NX = - 20

Solve for equilibrium level of income.

Question 3

Assume the economy has only households and firms, and the saving function is S = -20 + 0.3Y.
What will be the consumption at an income level of 114?

Question 4

You are given the following data concerning Happily:

(i) consumption function: C=400+0.75Y

(ii) investment function: I=100

a. Calculate the equilibrium level of income.

b. Derive a genera formula for MPC using Y, Ca and I.
c. Calculate the equilibrium level of Consumption and Saving in the economy.
d. If planned investment increases by an additional 100, how much would output increase by
using the above equation?
e. Can you prove your answer using the multiplier method?
Question 5

Suppose when GDP equals 3000, 3500, 4000, 4500, 5000 then consumption equals 2900, 3300,
3700. 4100, 4500. Planned investment is 300:

a. Calculate Saving, MPC and equilibrium level of output..

b. Derive the consumption function and saving function.

Question 6

If an increase in government expenditure of $10mn results in a $50mn increase in income, what

is the MPC?

Question 7

Assume the economy is experiencing a $500bn output gap. With an MPS of 0.2, how much
would tax have to change to bring the economy back to full employment?