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Unformatted text preview: Homework 10 Solutions ECON 010, Fall 2011 Question 1: Consumption and Savings You are given the information in the table to below about the economy of the United Kingdom. 1. You are given the information in the table to the right about the economy of the United Kingdom. a. Calculate the marginal propensity to consume. b. Calculate saving at each level of disposable income. c. Calculate the marginal propensity to save. 2. You are given the following information about the Canadian economy: Autonomous consumption expenditure is $50 billion, investment is $200 billion, and government expenditure is $250 billion. The marginal propensity to consume is 0.7 and net taxes are $250 billion net taxes are assumed to be constant and not vary with income. Exports are $500 billion and imports are $450 billion. a. What is the consumption function? b. What is the equation of the AE curve? c. Calculate equilibrium expenditure. d. Calculate the multiplier. e. If investment decreases to $150 billion, what is the change in equilibrium expenditure? f. Describe the process in e that moves the economy to its new equilibrium expenditure. 3. Suppose that the economy is at full employment, the price level is 100, and the multiplier is 2. Investment increases by $100 billion. a. What is the change in equilibrium expenditure if the price level remains at 100? b. What is the immediate change in the quantity of real GDP demanded? c. In the short run, does real GDP increase by more than, less than, or the same amount as the increase in the quantity of real GDP demanded in b? Disposable income Consumption expenditure (billions of pounds per year) 300 340 400 420 500 500 600 580 700 660 Disposable income Saving (billions of pounds per year) 300 40 400 20 500 0 600 20 700 40 a. Calculate the marginal propensity to consume. Answer: We see that when the disposable income in ceases by 100, Consumption expenditure increases by 80. Therefore, MPC = 4 C 4 Y D = 80 100 = 0 . 8 . b. Calculate the marginal propensity to save....
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