econ

Homework Assignment II (5 p.) – due Thursday, 05/02, before class. Please use canvas to submit your answers (as doc, docx, pdf).

Answer the following questions.

1) Assume the following values: Marginal Propensity to Consume (MPC) b = 0.8; Autonomous Consumption a = 250; Investment Spending I = 500. There is no government spending at this point.

a) For a consumption function C = a + bY, what is the equilibrium value for income Y in the economy (Y = C + I, here)? (1)

b) What is the value of Y if Investment Spending increases to 750? (0.5)

c) What can you observe in the change in Y that follows changes in I? How is the effect called that is apparent in your results? (1) 

d) If you add the government sector, with expenditure G = 250, what is the new equilibrium income? (For I = 750) (0.5)

2) What happens when the Marginal Propensity to Save (MPS) is reduced? How does equilibrium output change? (1)  

3) Use the MPS to explain the ‘paradox of thrift’. (1)