Question

You are given the following data concerning​ Freedonia, a legendary​ country: Consumption​ Function: C​ = ​+ Y ​Investment: I​ = Aggregate Expenditure​ Function: AE​ = C​ + I ​Equilibrium: AE​ = Y Calculate the​ following: a. The level of equilibrium​ income, Y​ = nothing. ​(Enter your response as an​ integer.) b. The value of the investment multiplier​ = nothing. ​(Enter your response rounded to one decimal​ place.) c. The change in the level of equilibrium income if investment increases by 10. ​= nothing. ​(Enter your

Answer 1

Answer and Explanation:

Given that

Consumption function C = 200 + 0.9Y

Investment I = 300

Aggregate expenditure  AE = C + I

Equilibrium AE = Y

Based on the above information

a. The level of equibrium income is

Y = AE = C + I

Y = 200 + 0.9Y + 300

0.1Y = 500

Y = 5000

b. The value of the investment multiplier is

= 1 ÷ (1 - MPC)

= 1 ÷ (1 - 0.9)

= 10

c. The change in the level of equilibrium income if investment increases by 10 is

Y = 200 + 0.9Y + 310

0.1Y = 510

Y = 5100

Change is

= 5,100 - 5,000

= 100