Problem 2:

Consider an econ

omy which is closed and has no government. Suppose the consumption function is given

by C = 50 + 0.4Y and the investment is given as I = 25.

a.

What is the equilibrium level of income in this case?

(5 points)

b.

What is the level of saving in equilibrium?

(2 po

ints)

c.

If, for some reason, output is at the level of 300, what is the level of involuntary inventory

accumulation? Is there an excess demand or excess supply of goods and services in the economy?

(3 points)

d.

If investment spending increases to 50, what woul

d be the changes in the equilibrium income?

(3

points)

e.

What is the value of the multiplier here?

(2 points)

f.

Draw a diagram indicating the equilibrium points in both parts (a) and (d).

(5 points)