1. Assume an economy of 1000 people is described by the following equations:

Y= 10L

C= 0.75(YT)

IP (Planned Investment) =2000

G= 2000

T= 2000

a. Assuming the economy is at full employment (i.e.L= 1000), find consumption, private saving, public saving, and total saving

b. Assume MPC falls to 0.5 but production stays at the full employment level

i. What is unplanned investment in this scenario? What happens to inventories? How does this affect firms' production next period?

ii. What is consumption? What is total savings? Does total savings equal total investment? Does total saving equal planned investment?

c. After the firm adjusts its production levels (still keeping planned investment fixed at 2000), a new equilibrium is re-established

i. What is the new equilibrium level of income? How many people will be employed?

ii. What are consumption and total savings in the new equilibrium? Did consumers accom- plish their goal of increasing their savings? Why or why not? To answer this question, it might be helpful to look at the reading "Wait, Is Saving Good or Bad? The Paradox of Thrift".

d. The government proposes a stimulus to get back to the previous level of output

i. How much does government spending have to increase (if taxes remain the same)?

ii. Does total savings change? Explain why by looking at the changes in private saving and public saving.