a) A model economy is characterized by the following equations: Consumption function:C(Y) =a+bY

Investments:I= 50

Parameters given:a= 100, b=0,8.

1. Determine the savingsfunction.
2. Explaintheconsumptionfunction andtheincomehypothesisitisbasedon.
3. Depicttheconsumptionfunction andaggregatedemandinadiagram.

b) In a closed economy without public activity the following consumption function is given:C(Y) = 100 + 0,8Y. Investments are autonomous:I= 50.

1. Howhigh is the equilibrium incomeY?
2. HowdoesYchange if the autonomous investments rise by20units? Interpret.
3. Howdoestheequilibriumchangeifthemarginal consumptionratefallsto 0, 6? Explain! Compare with the solution of a).

c) Explain the concept of the multiplier effect in general. You may use a numerical example.