• Consider the economy is characterized by the following behavioral equations: C = c0 + c1YD YD = Y - T I = b0 + b1Y Where: C - consumption Y - Income T - Taxes YD - Disposable income I - investment c0 -the value of Consumption when Disposable income is = 0, consumer confidence c0 -marginal propensity to consume b0 -the value of Investment when income is = 0 b0 -marginal propensity to invest, investors confidence a. Suppose the consumer decide to consume less (and therefore to save more) for any given amount of disposable income, and consumer confidence falls, determine what will happen to the level of output (GDP)? b. As a result of the effect on output, you determined in part a, what will happen to investment. What will happen to public savings?
• Explain. (Hint: Consider savings = investment) what is the effect on consumption?
  
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Answer rating: 100% (QA)

The income effect expresses the impact of increased purchasing power on consumption while the substitution effect describes how consumption is impacted by changing relative income and prices These eco... View the full answer