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Calculating Marginal Propensity to Save and Marginal Propensity to Consume
Consider the following table. For this hypothetical economy, the marginal propensity to save is constant at all levels of real GDP, and investment spending is autonomous. There is no government.
Real
GDPConsumptionSavingInvestment
($)($)($)($)
2,0002,200
4,0004,000
6,000
8,000
10,000
12,000
You need to:
1. Complete the table.
2. Calculate the marginal propensity to save.
3. Calculate the marginal propensity to consume.
4. Draw a graph of the consumption function using the Grapher. Then, add the investment function to obtain C+I.
5. Draw another graph showing the saving and investment curves under the C+I graph. What is the level of real GDP?
6. Calculate the numerical value of the multiplier.
7. Calculate the equilibrium real GDP without investment. What is the multiplier effect from the inclusion of investment?
8. Calculate the average propensity to consume at equilibrium real GDP.
9. If equilibrium real GDP is $8,000 when investment is $400, explain what happens to equilibrium real GDP if autonomous investment declines to $200.
(2) Calculating Average Propensity to Save and Average Propensity to Consume
A nation's consumption function (expressed in millions of inflationadjusted dollars) is
C=$800 +0.80Y. There are no taxes in this nation.
Now answer the following questions:
1. What is the value of autonomous saving?
2. What is the value of the multiplier?
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