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. Equilibrium real GDP is equal to $8,000. There is no government.
Real GDP ($) Consumption
($) Saving
($) Investment
($)
2,000 2,000
4,000 3,600
6,000 5,200
8,000 6,800
10,000 8,400
12,000 10,000
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.
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