Problem
Describe how equilibrium GDP is established in the Keynesian model. Consider the following table when answering the questions below. For this hypothetical economy, the marginal propensity to save is constant at all levels of income, and investment spending is autonomous. There is no government or foreign trade.
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 curve crosses the 45-degree reference line in the upper graph at the same level of real GDP where the saving and investment curves cross in the lower graph. (If not, redraw your graphs.) What is this level of real GDP?
d. What is the numerical value of the multiplier?
e. What is the equilibrium level of real GDP without investment? What is the multiplier effect from the inclusion of investment?
f. If autonomous investment declines from $400 to $200, what happens to equilibrium real GDP?
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.