Consider the table below when answering the following questions. For this hypothetical economy, the marginal propensity to save is constant at all levels of real GDP, and investment spending is autonomous. There is no governments.
a. Complete the table. What is the marginal propensity to save? What is the marginal propensity to consume?
b. Draw a graph of the consumption function. Then add the investment function to obtain C + I
c. Under the graph of C + I, draw another graph showing the saving and investment curves. Note that the C + I curve crosses the 45-degree reference line in the upper graph at the same level of real GDP where the saving and investment curve cross in the lower graph. What is this level of real GDP?
d. What is the numerical value of the multiplier?
e. What is the equilibrium real GDP without investment? What is the multiplier effect from the inclusion of investment?
f. What is the average propensity to consume at equilibrium real GDP?
e. If autonomous investment declines from $400 t $200, what happens to equilibrium real GDP?
| Real GDP |
Consumption |
Saving |
Investment |
$2,000
|
$2,200 |
|
$400 |
| 4,000 |
4,000 |
|
|
| 6,000 |
|
|
|
| 8,000 |
|
|
|
| 10,000 |
|
|
|
| 12,000 |