The following is a model of a closed economy with no government. C = 44 + 0.6YD

ID: 1248881 • Letter: T

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The following is a model of a closed economy with no government.
C = 44 + 0.6YD
I = 12

where C = desired consumption expenditure (in billions of $), YD = disposable
income (in billions of $), and I = desired investment expenditure (in billions
of $).

a) What is autonomous C equal to?
C= autonomous c+ incduced c
C = 44 + 0.6YD
autonomous C= 44, in the cosnumption fucntion , 44 is independint of YD.

b) What is induced C equal to if national income (Y) is 120?
Induced C= 0.6YD
   YD=120
Induced C= 0.6 x(120)
                 =72
Induced C=72

c) What would happen to C if Y increased by 10?
C = 44 + 0.6YD
in this 0.6 is marginal propencity to consume , which is also the slope of the consumption curve.
0.6= C/YD
C/YD= 0.6
C=0.6 x YD
YD=10
C=0.6 x 10
     = 6
so consumption increases by 6.

d) What is the saving function equal to?
Disposable incoome= C+S
S= YD- C
= YD - (44 + 0.6YD )
= YD - 44 - 0.6 YD
= 0.4YD - 44
S=0.4YD - 44

e) How can private saving (S) be negative? Explain.
S=0.4YD - 44
if saving is negative than S=-1
-1= 0.4YD - 44
YD= 107.5
when income is less than or equal to 107.5 than the saving will be negative.

f) What would happen to S if Y increased by 10?
S=0.4YD - 44
MPS= 0.4= s/Y
            S=0.4 x Y
                 = 0.4 x 10
                 =4
Savings increases by 4.

g) At what level of Y is the average propensity to consume (APC) equal to 1?

APC= C/Y
when Y= Consumption, APC=1

h) How does the APC change as Y increases?
As Y increases APC decreases, initially it will be at 1 as Y increases, it becomes less than 1...(for ex:0.99,0.98 and so on...)
i) How does the average propensity to save (APS) change as Y increases?
As Y increases APS will increase, initially APS will be zero,
APS+APC is always equal to 1.

j) What is aggregate expenditure function equal to?
AX= C + I + G + Xn
C = Consumption Expenditure
I= Investment
G = Government spending
Xn = Net exports (Exports-Imports)

As it is a closed economy, there will be no Xn and G is given 0
So,
AX= C+I
     =44 + 0.6YD + 12
     = 56 + 0.6 YD
AX=56 + 0.6 YD

k) Is the economy in equilibrium when Y is 150? If no, then by how much are
the economy’s inventories changing?
At equilibrium Y= AX
                          AX when Yis 150
AX= 56 + 0.6 x 150
= 146
AX and Y are not equal so it is not at equilibrium
Equilibrium Y is at 140.

l) What are the equilibrium levels of Y, C, S, and YD?

Eq Y,
AX= Y
56 + 0.6 Y= Y
Y= 140.
When Y= 140
C= 44 + 0.6YD
   = 44+ 0.6(140)
   = 44 +84
   = 128
S=0.4YD - 44
= 0.4(140) -44
=12
YD= Y

As per companies norms,Multiple questions cannot be answered in single post...
Plz post the rest in another rpost

m) At equilibrium, what do the injections and the withdrawals in this
economy equal?
n) Give two reasons why investment would change from I = 12 to I = 18.
o) What are the new equilibrium levels of Y, C, S, and YD if investment
changed from I = 12 to I = 18?
p) What is the size of the (simple) multiplier?
q) What is the change in Y in the 3rd round of the multiplier effect as a
result of the change in investment in part n?

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The following is a model of a closed economy with no government. C = 44 + 0.6YD

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The following is a model of a closed economy with no government. C = 44 + 0.6YD

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