In question 8, assume that, beginning from the initial equilibrium position (inv

Question

In question 8, assume that, beginning from the initial equilibrium position (investment equal to 100, government expenditure equal to 75, and net taxes fixed at 100), there was an autonomous fall in consumption and an increase in saving such that the consumption function shifted from C = 25 + 0.8 Y_D to C = 5 + 0.8 Y_D Find the change in equilibrium income resulting from this autonomous increase in saving. Calculate the level of saving before and after the shift in the consumption and, therefore, the saving function. How do you explain this result?

Explanation / Answer

a)

Y = C + I + G

Y = 5 + 0.8(Y - T) + I + G

Y = 5 + 0.8(Y - 100) + 100 + 75

Y = 180 + 0.8Y - 80

0.2Y = 100

Y = 500

b) Saving = Income - Consumption = 500 - (5 + 0.8(500 - 100)) = 500 - (5 + 320) = 500 - 325 = 175

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