Question: 1. [ Exercise 1 (20 marks) ] Consider a simple economy which is characterized by the following behavioral equations: C = 100 + 2 3

1. [ Exercise 1 (20 marks) ] Consider a simple economy which is characterized by the following behavioral equations: C = 100 + 2 3 YD I = 120 G = 250 T = 200 Y = 800 Where C=Consumption spending; YD=disposable income; I=investment spending; G= government spending; and T=taxes paid minus government transfers received by consumers. Remember that YD = Y T). (a) ( 5 marks) Use the above information to compute: (i) (2 marks ) private saving (Spr) (ii) (2 marks public saving (Spb) (iii) (1 marks national saving (Sn) (b) ( 5 marks) Using the private saving function, determine the marginal propensity to save. Interpret your result. (c) ( 5 marks) What is the investment multiplier in this economy? Give an economic interpretation. (d) ( 5 marks) Now suppose that government spending is reduced by 50. (i) (3 marks ) Compute private saving (Spr), public saving (Spb) and national saving (Sn) (ii) (2 marks) What is the difference with question (a)?

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