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Explain what is meant by the multiplier

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Introductory Macroeconomics

1. Assume the saving function for an economy is S = - 200 + .2Y. Derive the consumption function from this information and show your work.

2. Assume the level of saving that would take place in an economy is - $200 even when aggregate output is zero. Also assume that the marginal propensity to save is .1. Derive the algebraic expression for the saving function and the consumption function.

3. Assume a two sector economy where C = $100 + .9Y and I = $50. Calculate the equilibrium level of output for this hypothetical economy. What would the level of consumption be if the economy were operating at 1400? What would be the amount of unplanned investment at this level? In which direction would you expect the economy to move to at $1400 and why?

4. Prove through the use of algebra that in a two sector economy saving must be equal to planned investment at the equilibrium level of output. (Hint: Remember that C + S = Y)

5. Explain what is meant by the multiplier and explain what variable(s) determines its size.

Reference no: EM13831773

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