Consider an economy is which taxes, planned investment, government spending on goods and services, and net exports are autonomous, but consumption and planned investment change as the interest rate changes. You are given the following information concerning autonomous consumption, the marginal propensity to consume, planned investment, government purchases of goods and services, and net exports:
Ca = 1,500 - 10r c = 0.6 Ip = 2,400 - 50r G = 2,000 T = 1,800 NX = -200
(a) Compute the value of the marginal propensity to save.
(b) Compute the amount of autonomous planned spending, Ap, given that the interest rate equals 5.
(c) Compute the equilibrium level of income, given that the interest rate equals 5.
(d) Suppose that autonomous consumption changes by 4 percent of any change in household wealth and that the decline in the housing market in 2006-07 and drop in the stock market in the summer of 2007 reduces household wealth by $750 billion. Compute the decrease in autonomous consumption that results from the decline in household wealth.
(e) Calculate the new amount of autonomous planned spending, Ap, and the new equilibrium level of income, given that the interest rate equals 5.
(£) Using your answers to parts c-e, compute the value of the multiplier.