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Suppose that I = 100, G = 50 and T = 100. There was a fall in autonomous level of consumption because of which the
Suppose that I = 100, G = 50 and T = 100. There was a fall in autonomous level of consumption because of which the consumption function changed from C = 10 + 0.75YDto C' = 5 + 0.75YD.(50 points)
- Write the aggregate demand equation using C. In that aggregate demand equation, identify the part(s) that is (are) autonomous and the part(s) that is (are) induced expenditure.(4 points)
- Write the two savings functions (in terms of YD) associated with C and C'. Identify the MPS and the autonomous part of savings in each case. Interpret the meaning of MPS in each case.(4 points)
- If you go from C to C', by how much will the equilibrium income change in the third round of adjustment? Show your work.(4 points)
- By how much will equilibrium income eventually change using the multiplier?(4 points)
- Calculate the equilibrium level of incomes associated with C and C'? Show your work. Does this change match up to what you calculated using the multiplier?(10 points)
- Calculate the equilibrium level of incomes associated with C and C'? But this time use S + T = I + G condition. Show your work. Do you obtain the same conclusions as you did in part (e)?(10 points)
- What was C and what was S at the two equilibrium income levels?(4 points)
- Suppose the income associated with C was the full employment level of output and now you are at an output level associated with C'. By how much should G change to reach the full employment level? By how much should T change to reach the full employment level?(6 points)
- If the government wants to keep the budget deficit or surplus same as before, and at the same time reach the full employment level of output, what should it do?(4 points)
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