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In a closed economy with no government sector, consumption (C) and income (Y) are related by the equation:
C= A + cY
a. What is the marginal propensity to consume and how do you interpret it?
b. How is the level of savings related to income in this economy?
Suppose that A = £400, c = 0.75 and the level of investment is £500:
c. At what level of national income would savings be zero?
d. What would be the equilibrium level of income?
e. How would you show what happens with equilibrium income if agents suddenly lose confidence and decide to spend less, even if their income has not changed?
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