Answer to Question #258997 in Macroeconomics for Sew

Question

Following macroeconomic data is given for a hypothetical economy. All Values are given in

Rs. Millions.

a) Compute Marginal Propensity to Save

b) Derive the saving function of this economy

c) Calculate the equilibrium level of national income.

d) If government purchases rise to Rs. 250 million, calculate the expenditure

multiplier and new equilibrium national income.

Consumption (C) 300 + 0.8Yd

Investment (I) 200

Taxes (Te) 100

Government transfer to household (Re) 80

Government Purchases (G) 150

Answer 1

a) Marginal Propensity to Save (MPS) = $\frac{change\ in\ savings}{change\ in\ disposable}$ = $MPS = \frac{ΔS}{ ΔY}$

b)The saving function $S = -a + (1 – b) (Y – T)$

c)Equilibrium level of national income is obtained when the aggregate supply (AS)= aggregate demand (AD).

d) Multiplier = $\frac{1}{1 - MPC}$

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