Consider a closed economy without government.

C = $3000 + 0.8Y, I = $500

(i)Explain the marginal propensity of consume (MPC). Based on information given

above, what is the value of MPC?

(ii)Using the information above, derive the saving function. Show your workings clearly.

(iii)Determine the equilibrium level of income for this economy. Show your workings

clearly.

(iv)What is the level of autonomous consumption given the consumption function?

(v)Based on your answer in part ii), what is the amount of total saving IF the equilibrium

level of income is $ 16,000? Show your working.

(vi)Based on your answer in part iii), if the full employment level of income is at $16,500,

does it experience a deflationary gap or an inflationary gap? Using the information given, illustrate this with a Keynesian 45 diagram.

(vii)If new investment amount is $700 and given the equilibrium income in part iii), what

is the new equilibrium level of income? Use multiplier approach.

(viii) Explain ONE (1) reason that would cause firms to increase their investment activity. Use a Keynesian 45 diagram to illustrate the effects of such activity.