Problem
Consider the following economy where autonomous consumption is 660, the marginal propensity to consume is 0.8, autonomous taxation is 200, the income tax rate is 0.2, planned investment is 500, government spending is 500, autonomous net exports is 300 and nx is 0.04. (a) Calculate the equilibrium value of income (Y). (b) Calculate the value of the multiplier. (c) Calculate the value of total consumption when the economy is in equilibrium. (d) Illustrate (draw) the consumption function; identifying where savings and dissavings (negative savings) occur. Make sure you clearly labelling every component (ie, autonomous consumption, equilibrium income with values) (e) State the corresponding savings function (showing the value of autonomous savings and the marginal propensity to save). (f) Show that leakages are equal to injections (remember to show each stage of your calculation). (g) Suppose that government spending falls by 150. Calculate by how much the economy will contract as a result; using the multiplier equation.
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.