a)The following data relate to the economy of XYZ

Shilling "million"

Investment 4,000

Government Spending10,000

Autonomous consumption8,000

Net exports3,600

The marginal propensity to save of the economy of country XYZ is 0.4

Required:

i)Write the consumption function of the economy.

ii)Compute the equilibrium level of income in the economy.

b)Describe the three methods of computing Gross Domestic Product.

c)Suppose you have been told that the marginal propensity to consume for Kenya is 0.75. By how much will consumption and savings change if aggregate expenditure (i.e. Disposable income) is increased by ksh.1million?

d)Showing your workings, what would be the multiplier when marginal propensity to consume is 0.4, 0.7 and 0.8?

e)Explain why exports are added to, and imports are subtracted from, aggregate expenditures in moving from a closed to an open economy.