Assume that when an economy has a GDP of $500, Consumption is $550. The MPC is .75. Investment is 25. Begin the problem by setting up an Income/Consumption Schedule like the one on page 190 of your text. Set up only the first two columns (1) and (2).

            Level of          

            Output            

            And

            Income            consumption

            (GDP=DI)                     ( C )

            $500                $550

1. Graph the Consumption Function.

2. Add Investment to the graph.

3. What is the multiplier?

4. What is the Break-Even level of Income? (Do not include Investment)

5. What is the Equilibrium level of Income? (Include Investment)

6. What would be the new equilibrium in this economy if Investment increased by $12?