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##### onsumption function for this economy

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solution

**Question**

S = -$500 +.2Y;Ip = 300;G = T = Xn = 0;a) what is the consumption function for this economy?;b) What is the equilibrium level of GDP?;c) How much is saved at equilibrium?;d) If savings fell by $200 at every level of GDP, what would be the equilibrium level of income?;Hint;With the information given, set savings equal to investment and solve for Y. From the, you can do b and c.;The multiplier is 1/1-mpc, which you can figure out from the info given to answer d, where the change in gdp will equal the change in spending times the multiplier. Fro a, you need to remember that mpc+mps =1 and that autonomous consumption is the negative of autonomous savings, which is given;In general, equilibrium gpd is equal to aggregate expenditure, so setting Y equal to the sum of the 4 components of spending, which you're given. On part a, savings plus consumption equal Y, so if you have one function, you can derive the other.;The book is Principles of Macro Economics - 3rd Edition by Robert H Frank and Ben S. Bernanke

Paper#27124 | Written in 18-Jul-2015

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