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Values of marginal propensity to consume

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Reference no: EM132479134

1. The following equations describe an economy:

Consumption : C = 30 + 0.9YD

Investment : I = 500 - 14i

Government Spending : G = 200

Transfer Payments: TR = 200

Taxes: TA = 0.2Y

LM Curve : Y = 2,500 + 100i

Re al Money Demand : L = kY - hi

Money Suppy : MS = 1,500

Price Level: P = 2

where Y is income, i is the percentage of interest rate, YD is the disposal income, and k and h are parameters that govern the real money demand.

(a) What are the values of (i) marginal propensity to consume out of disposal income and (ii) marginal propensity to consume out of total income? Show your work. (i) = 0.9, (ii) = 0.72

(b) Derive the IS equation for the economy. Show your work.

(c) Find the values of (i) k and (ii) h that are consistent with the money market equilibrium. Show your work.

Please answer (b) and (c). Answer (a) provided.

Reference no: EM132479134

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