Question 1 You are in an economy whose consumption is equal to the following function: C = 65 + 0.8Y The economy has no government expenditure and does not have any foreign trade at present but does have investment expenditure, which is constant at 150. a) What is the level of autonomous consumption? b) What is the marginal propensity to consume? c) What is the marginal propensity to save? d) What is the level of the multiplier? e) What is the equilibrium level of income?

Question 2 a) What is meant by discretionary fiscal policy? b) Why might a government find it necessary to implement discretionary fiscal policy?

Question 3 In what way would you expect each of the following items to affect the demand for real money balances? i) An increase in real income Increase/decrease in demand ii) An increase in confidence about the future Increase/decrease in demand iii) An increase in the opportunity cost of holding money Increase/decrease in demand iv) A fall in nominal interest rates Increase/decrease in demand v) An increase in uncertainty concerning future transactions Increase/decrease in demand vi) An increase in the monetary base brought about by the Central Bank interventions in the money market Increase/decrease in demand