Freedonia, a legendary country:
(1) Consumption function: C = 1000 + 0.95Y
(2) Investment function: I = 400
(3) AE = C + I
(4) AE = Y
a. What is the marginal propensity to consume and the marginal propensity to save?
b. Solve for equilibrium income.
c. Suppose the second equation is changed to I = 500. What is the new equilibrium level of income? How much does the $100 increase in investment change equilibrium GDP?
d. Calculate the saving function.