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You are given the following data concerning Freedonia, a legendary country:
(1) Consumption function: C = 200 + 0.8Y
(2) Investment function: I = 100
(3) AE C + I
(4) AE = Y
a. What is the marginal propensity to consume in Freedonia, and what is the marginal propensity to save?
b. Graph equations (3) and (4) and solve for equilibrium income.
c. Suppose equation (2) is changed to (2´) I = 110. What is the new equilibrium level of income? By how much does the $10 increase in planned investment change equilibrium income? What is the value of the multiplier?
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Give a brief summary and description of the example.
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