Question

YU core: UOL i pi ext Problem 4.5a Question Help You are given the following data concerning Freedonia, a legendary country: . Consumption function: C = 100+ 0.80Y • Investment function: I = 300 Aggregate expenditure function: AE = C + Equilibrium: AE = Y The MPC in Freedonia is 0.8. (Round your response to two decimal places.) The MPS in Freedonia is 0.2. (Round your response to two decimal places.) The level of equilibrium income, Y, is $ 2000. (Enter your response as an integer.) The value of the investment multiplier is 5. (Round your response to two decimal places.) Suppose the level of investment increases by $10. The change in the level of equilibrium income if investment increases by $10 is $ . (Round your response to two decimal places.)

Answer 1

The MPC = 0.80

The MPS = 1 - MPC = 1 - 0.80 = 0.20

At equilibrium, Y = C + I

Y = 100 + 0.80Y + 300

Y - 0.80Y = 400

0.20Y = 400

Y = 400 / 0.20 = $2,000

The value of investment multiplier = 1 / MPS = 1 / 0.20 = 5.00

If investment increases by $10, the changes in level of equilibrium income = $10 * Investment multiplier = $10 * 5.00 = $50.00